Eurozone economic indicators have overall been benign, the economic wheels continue to spin, albeit slowly. Eurozone GDP growth advanced 0.4% in the quarter three months to December of 2016.
Euro Area GDP Growth Rate 1995-2017 | Data | Chart | Calendar | Forecast The Eurozone economy advanced 0.4 percent on quarter in the three months to December of 2016 ...
While this may not seem like fireworks the euro bloc is no longer the worse performing economy of the major advanced developed economies. At the bottom of the list came Japan with its economy barely growing in the final quarter of 2016, posting just 0.2% growth. The UK economy outperformed the EU's by a slight margin growing 0.5% in Q4, 2016.
Then there is a gap with the top performers shooting ahead. The second best-performing economy was the US which expanded by 1.9% in the final quarter of 2016.
At the top of the list, leaving all other economies well behind in its rear mirror is China with its economy expanding by 6.8% during the same period.
Nevertheless, let's not discount the fact that euro bloc economy is battling some fierce political headwinds. A nationalist popular sentiment is sweeping the continent. First with Brexit, then with the French presidential elections scheduled to be held on May 7 will most likely be the euro bloc's pivotal point. The EU's existence (post-WWII order in Europe) together with the fate of the euro stands in the balance. Indeed, should the French electorate put in power Le pen's far right Nationalité (National Front) party the EU project and the euro are doomed. That is the sharp reality.
But the Euro is also a pillar of support for the entire western financial banking system. Euro sovereign bonds are the collateral that commercial banks pledge to raise finance.
If the Euro were to collapse so too would the value of Euro bonds which was valued at 20.3 trillion euros in 2014.
Europe's 20.3 trillion-euro ($26.1 trillion) bond market is shrinking as financial institutions repay debt, according to Citigroup Inc. analysts in London.
This doom scenario would play out something like this;
Investors (commercial banks) would be left holding worthless euro bonds and in a desperate attempt to raise their capital base they would freeze credit, (perhaps even call up loans) and sell other assets too. The great unwinding of stocks and real estate would follow leading to a Great Depression scenario, the collapse in the value of all asset classes, real estate, bonds, equities.
Europe's largest bank, Deutsche Bank with its €46 trillion derivatives book exposure would soon be declared insolvent. The almost simultaneous collapse of the euro, euro bonds and Europe's largest bank would blow the collateral chains off the entire western banking system, thereby making the 2008 financial crisis (triggered by Lehman brothers) look like a picnic.
With bank closures, credit frozen just in time Inventory management system would breakdown.
Then the situation would rapidly deteriorate.
Grocery stores would run out of food supplies within days. The hungry, angry mass of people would take to the streets (what would they have to lose), social order would collapse within weeks.
How are bankrupt governments going to pay the salaries for law and enforcement officers to keep the peace and maintain law and order?
Frankly, it would be a mad max scenario.
That is why I don't believe it is going to happen. Think about it, if the forex market, the precious metals market, the LIBOR market is rigged then everything worth fixing is "fixed."
The western elites would have too much to lose from a Le pen victory, EU disintegration, euro collapse and a financial apocalypse. So my two cents worth is that Le pen won't be permitted to win.
However, having said all the above I am also a little spooked by the article below.
For the first time since the Cold War the German government is advising citizens to stockpile food and water for use in a national emergency. Some opposition MPs said ...
The worse trait you could have as an investor/trader is being over confident. Remember the golden rule; no trade position in your portfolio should be big enough to crush you if it goes horribly wrong.
While I don't believe Le pen will win, and the contrarian trade (risk on EU assets, particularly European banking) could be the play of 2017. However, it would also be prudent to hedge against that position in the unlikely event of a disaster (EU disintegration and collapse of the euro). Don't become another statistic-another trader/banker jumping from a high window.
So let's assume Le pen fails to secure an election victory in the May French Presidential elections.
If the eurozone economy has managed to push against the political headwinds of anti-EU parties and still posted a modest economic growth in Q4, 2016 what would the bloc's economy do when those headwinds are lifted?
Put another way EU assets could be undervalued, assuming a Le pen failure.
ECB President Draghi's less dovish tone this week underscores the fact that a sense of urgency has gone.
Draghi said the "balance of risks to growth has improved" and noted that The ECB had "removed reference to signal a sense of urgency."
So it will be very interesting to see how all this plays out (since the outcome will have an impact on everyone). Meanwhile, euro and euro stocks continue to recover as I write this piece.