Macroscope | Germany’s Deutsche mark could make a surprise return from currency extinction

Doomsday may be creeping up again, but you would never guess so considering the seemingly endless appetite for global risk assets right now. Europe is heading into a perfect summer storm, but global investors remain in party spirits. It is unlikely to last too much longer.

The writing is on the wall for the euro in the next few months and so too is the eight-year bull market for global equities and credit.

Europe is facing up to a horror show of risk in the next few months and European unity and the euro are unlikely to survive intact. Upcoming French elections, the threat of Grexit and the risk of a major credit event in Italy should be putting global investors on high alert right now. There is even the chance that German Chancellor Angela Merkel could be on the way out after September’s national election.

Global investors can hardly be blamed. All they are doing is “making hay while the sun shines” pumped up on a raft of central bank-generated global liquidity. But, you can bet your synthetic-bottom dollar that investors will beat a quick retreat and run for cover as soon as the tide turns. 2008’s financial crash and the 2010-12 European crises left investors with livid scars.

All it takes is for one euro zone country to exit the single currency and chaos will ensue. Whether France leaves the euro, Greece opts for debt default, or the mother of all credit events happens in Italy, the result is still the same. The euro is finished, European political cohesion is over and the European Central Bank faces extinction.

The ECB has already reached its point of no return. Euro interest rates are sub-zero, the bank’s asset sheet is bloated with distressed debt and the ECB’s QE super-stimulus is earmarked for shutdown later this year. There is nothing left in policy reserve once the “house of cards” comes crashing down.