Market overview – Richard Carter, Head of Fixed Interest Research
Politics is at the forefront of investors minds this week, with Japanese stocks soaring in response to a market-friendly party leadership outcome while French stocks and bonds have slumped as prime minister Sebastien Lecornu resigned less than a month after his appointment.
Sanae Takaichi’s election as leader of Japan’s ruling Liberal Democrat party saw the Tokyo stock market jump nearly 5% on Monday while the Yen depreciated, as investors bet on more fiscal stimulus from the country’s expected next prime minister. Takaichi is now on course to become Japan’s first female prime minister following a parliamentary vote scheduled for later this month. An expectation of increased defence spending boosted defence stocks, while pharmaceuticals, automakers and semiconductor stocks also gained.
Polls had indicated that Shinjiro Koizumi, a more fiscally conservative candidate, would win the leadership race so Takaichi’s victory represents a positive surprise for the markets. Takaichi is also expected to maintain pressure on the Bank of Japan to keep interest rates low while leading equity analysts have predicted a closer strategic alignment with the US on defence and economic security. Last week the Japanese stock market fell 0.9% (+14.3% YTD).
Lecornu steps down
In France, markets have taken a less positive view of recent political developments with Sebastien Lecornu’s resignation of prime minister causing stock, bond and currency markets to decline. With a tenure that lasted less than one month in office, Lecornu is the shortest-serving prime minister since the Fifth Republic was established in 1958.
The move to step down was prompted by indications from the centre-right Les Republicans that they would not support his government. The leftwing Socialist party also threatened to vote it down.
Since Macron’s snap elections in the summer of 2024 there have now been three prime ministers who have left office. The vote revealed stark divisions and has made governing increasingly difficult due to burgeoning budget deficits and very little appetite to rein them in.
The spread between French and German debt can be seen as indicative of market concerns and this recently reached its highest level since the Eurozone debt crisis more than 10 years ago at 0.88 percentage points (0.88%).
Weekly economic announcements:
Last week the MSCI All Country World Index gained 1.7% (19.9% YTD).
United States:
US equities added 1.1% last week (15.3% YTD), with small caps outperforming to rise 1.8% (12.2% YTD). Tech benchmarks rose 1.3% (18.6% YTD). The US government shutdown may have weighed on sentiment a little early in the week, but market participants looked through this to post a solid weekly gain.
The market impact of past government shutdowns has been minimal. There have been 10 government shutdowns since 1980 and on only two of these occasions have US equities declined during the period. These declines were modest, low single-digit declines, and more often than not, US stocks have gained during government shutdowns.
There was no monthly employment report published due to the shutdown and the upcoming consumer price index release is at risk of also not occurring. Weekly jobless claims figures are expected to still be released, so there will be some guide on the state of the US jobs market, but the absence of the main data point is far from ideal at a time when uncertainty regarding the future path of interest rates could quickly increase.
United Kingdom:
It was a good week for UK stocks, rising 2.3% (19.5% YTD). The economic calendar was relatively light, with a three-month decline in mortgage approvals the only real data of note. This came after three consecutive rises. House prices increased 0.6% seasonally, adjusted, in September after falling 0.1% in the prior month.
The 10-year gilt yield fell five basis points (0.05%) on the week, ending at 4.69%. The pound edged higher against the US dollar, closing the week at US$1.35.
Europe ex UK:
European equities posted strong weekly gains as the MSCI Europe ex UK Index advanced 3.0% (15.0% YTD) to new highs. German stocks added 2.7% (22.5% YTD), French benchmarks gained 2.8% (13.0% YTD) and Italian Bourses added 1.4% (31.4% YTD). /p>
Approver: Quilter Cheviot 6 October 2025
