The following is a guest editorial courtesy of Carolane de Palmas, Markets Analyst at Retail FX and CFDs broker ActivTrades.
As the U.S. government shutdown enters its second week, investors are questioning whether it could mirror the record 35-day standoff of 2018. Yet the shutdown is not the only source of political uncertainty influencing global markets. Developments in Japan and France are also drawing attention, with the likely election of Japan’s first female prime minister and the sudden collapse of the French government adding new layers of volatility across currencies, equities, and bonds. Here’s a closer look at the three political events driving market sentiment this week.
Two Funding Proposals Failed in the U.S. Senate
The U.S. government shutdown has entered its seventh day after both major funding proposals failed to pass in the Senate. The latest Republican stopgap bill, which sought to fund the government through November 21, fell short in a 52–42 vote, while the Democrats’ alternative also failed, receiving only 45 votes in favor. The deadlock reflects deep partisan divisions that have made shutdowns a recurring feature of U.S. politics. Republicans may lead Congress, but the essential 60-vote requirement in the Senate prevents them from passing spending bills without getting Democrats on board.
The standoff mostly centers on a dispute over healthcare funding. Democrats are seeking to include the extension of enhanced Obamacare subsidies in the temporary funding bill, an effort Republicans oppose, arguing the issue should be postponed until later in the year. President Donald Trump has amplified tensions by threatening additional layoffs in the federal workforce, adding to the hundreds of thousands of government employees already furloughed. Around 40% of the federal workforce—roughly 800,000 people—are expected to be placed on unpaid leave according to the BBC, raising concerns about the broader economic impact. Economists estimate that each week the shutdown continues could reduce U.S. GDP growth by up to 0.2 percentage points.
The political impasse comes at a time when the U.S. economy is already contending with uncertainty from trade tariffs, prior spending cuts, and a slowing job market. Despite the ongoing shutdown, U.S. markets remained resilient at the start of the week as market participants focused on artificial intelligence. The Nasdaq and S&P 500 both closed at record highs, supported by optimism over AI-related dealmaking. Gold prices climbed to a fresh record near $3,997 per ounce as investors sought safety amid rising expectations of a Federal Reserve rate cut at the October meeting. Bitcoin also reached a new all-time high above $125,000, while Treasury yields moved higher as investors continued to assess the potential fallout from the prolonged government closure.
Nasdaq (USATEC) and S&P500 (USA500) – Source: TradingView with ActivTrades Data.
French Prime Minister Stepped Down After One Month in Office
France has entered a new phase of political turmoil after Prime Minister Sébastien Lecornu resigned just 27 days into his tenure, marking the country’s shortest-lived administration in modern history. His government lasted less than a day after announcing its cabinet, underscoring the deep divisions in parliament and the mounting challenges facing President Emmanuel Macron’s leadership. The timing of this collapse is particularly problematic, as it happened only days before the deadline for the government to submit its 2026 budget bill.
France is facing significant strain on its public finances, with national debt currently standing at 113.9% of GDP. Furthermore, last year’s deficit was nearly double the European Union’s 3% limit. Although the government’s deadline to present its budget is October 7, constitutional rules offer some limited flexibility until the middle of the month. The current political impasse risks delaying the process and could force the use of emergency measures to maintain government operations. Macron, whose mandate runs until May 2027, has not yet commented publicly. He is under growing pressure from opposition parties to call a snap parliamentary election or appoint a new prime minister—possibly a technocrat—to restore stability.
Financial markets reacted sharply to the political uncertainty. The CAC 40 dropped 1.4%, its steepest one-day fall since August, after losing as much as 2.1% earlier in the session, ending a six-day rally. The selloff was partly cushioned by gains in semiconductor stocks following AMD’s deal with OpenAI, but French equities remain among the laggards in Europe this year, up just over 7% compared with double-digit advances in most major markets. Bond yields climbed, with the 10-year benchmark reaching a one-week high, while the euro weakened. The decline was led by luxury and banking shares, reflecting investor concerns over France’s fiscal outlook and ongoing political instability.
Daily French CAC 40 – Source: ActivTardes’ Online Platform.
The New Head of Japan’s LDP Likely to Become the First Female Prime Minister
The ruling Liberal Democratic Party (LDP) elected Sanae Takaichi as its new leader this weekend, a move that paves the way for her to become Japan’s first female prime minister. A close ally of the late Shinzo Abe, Takaichi is known for her strong conservative stance and commitment to reviving the spirit of “Abenomics” through expansionary fiscal and monetary policies. Her platform emphasizes increased government spending on strategic sectors such as artificial intelligence, semiconductors, nuclear fusion, and defense—areas she views as central to strengthening Japan’s competitiveness and national security.
Even though the LDP-led coalition lost its majorities in both houses this past year, the party still holds enough power in the critical lower chamber to virtually ensure Takaichi will be elected prime minister when parliament votes mid-October. Japan’s political system gives the lower house the final say if the two chambers disagree, a precedent that has historically secured the LDP leader the premiership such as in 2008.
Japanese stock markets reacted positively to her election, with the Nikkei 225 surging past 48,000 for the first time in history, marking its second consecutive record high today. Gains were strongest in technology and defense-related stocks, sectors expected to benefit from Takaichi’s pro-investment agenda. Meanwhile, expectations for near-term rate hikes by the Bank of Japan eased, leading to a sharp flattening of the yield curve. Long-term Japanese government bond yields spiked with the yield of the 30-year JGB reaching a record high, while shorter-term yields declined more modestly. The yen weakened nearly 2% against the dollar and reached an all-time low versus the euro, reflecting investors’ anticipation that monetary policy will remain accommodative under the new leadership.
Daily EUR/JPY Chart – Source: ActivTrader.
Sources: Wall Street Journal, Reuters, CNN, BBC, CNBC
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