07.10.25 - Political themes take the spotlight
In Japan, Sanae Takaichi won the Liberal Democratic Party’s leadership election last weekend, positioning her to become the country’s first female prime minister.
Markets reacted swiftly and positively, buoyed by expectations of renewed fiscal stimulus and a weaker yen supporting exporters.
In Europe, meanwhile, France is once again facing political turbulence. Prime Minister Sébastien Lecornu abruptly resigned on Monday, less than a month into his term and only 14 hours after presenting his cabinet. President Macron has given him until Wednesday to form a new cabinet, underscoring the fragility of France’s political landscape.
Markets: opposite reactions
Japan: equities surged around 5 %, led by export-oriented stocks, while bond yields climbed and the yen weakened further as investors priced in a more expansionary fiscal policy.
France: The CAC 40 index fell nearly 2 %, and French bond yields moved higher, reflecting rising political risk and the addition of a risk premium to sovereign debt.
My View: With limited economic data available, partly due to the US government shutdown, and the earnings season yet to begin, political developments have taken center stage in driving short-term market sentiment.
Typically, politics act only as temporary market movers. Yet in the current vacuum of hard data, they have become the dominant narrative.
In Japan, expectations of a large fiscal push could clash with already elevated public debt levels, potentially putting upward pressure on borrowing costs. A weaker yen may provide support to exporters, but given the market’s rally to record highs, I prefer to stay cautious and refrain from new active positions in the region for now.
In France and across Europe more broadly, the challenges run deeper. The continent faces a confluence of political, economic, and market headwinds. As discussed in my blog article “Europe – The Struggling Candidate”, I see little room for meaningful upside and expect the negative momentum to persist — slowly but steadily.
Within Europe, I maintain a selective approach, focusing on valuation discipline and sustainable dividend yields rather than broad market exposure.
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