The calm at the start of the week on the markets has given way to renewed turmoil. Currency strategist Simon Derrick argues this may not just be a short-term hiatus, but could mark a tipping point for the eurozone and the single currency.
We've been negative about the outlook for the eurozone for some time and have struggled to explain the euro's relative strength in the face of rapidly mounting concerns.
Indeed, there have been times, particularly over the past week, when the euro's performance has reminded us of the point where Wile E Coyote runs off the edge of the cliff and fails to fall simply because it does not occur to him to look down.
Of course, all this changes the moment his forward momentum runs out, he finally glances into the chasm below and then falls to his fate.
Tightening the screws
Perhaps the point at which we felt that solid ground ran out for the euro to be replaced by thin air was at the end of Chancellor Angela Merkel and President Nicolas Sarkozy's press conference on Tuesday evening.
By rejecting the idea of eurobonds or an increase in the size of the 440bn-euro rescue fund, the European Financial Stability Facility, and, in addition, promoting the idea of balanced budgets, it seemed that France and Germany were pushing for extremely tight fiscal conditions for the periphery at a point where confidence in local markets was already ebbing away rapidly.
If this were not enough, they also proposed to remove any comparative advantage that nations such as the Irish Republic might enjoy by looking to harmonise corporate tax rates.
The message was clear enough: Germany and France have scant interest at this point in doing anything other than protecting the credibility of their own markets and therefore have little to offer their weaker non-core partners such as Portugal and Greece, except even more austerity whether they like it or not.
Despite this, it seemed that for a brief moment markets were convinced that this represented a genuine breakthrough.
The day after the press conference, the Italian stock market hit its highest level in a week (a good 12% above the trough seen the previous Thursday), while the yield gap between Italian 2-year paper and its German equivalent reached its narrowest point since 25 July (i.e. just after the Greek bailout was announced). In line with this, the euro briefly traded back above US$1.45.
Although it might have seemed that the reaction had been sanguine, there was one small sign that something was wrong.
In particular, it was apparent that the yield gaps between Greek and German debt were starting to move out again in the aftermath of the comments from Chancellor Merkel and President Sarkozy.
This was telling. It seemed to us that the press conference had left peripheral nations with a stark choice: They either accepted the harsh economic conditions that the press conference implied would be prevalent or decide that it is simply too much of a burden to bear.
This price movement suggested that others might be thinking the same thing.
Fragile recovery over Yesterday seemed to be the point that when the eurozone finally looked down.
The catalyst appeared to be a combination of the report in the Wall Street Journal that Federal Reserve officials were "very concerned" about European banks facing potential funding difficulties in the US and a rising wave of demands from Northern European nations for collateral from Greece.
Whatever the case, the heavy losses seen on European bourses suggested that the fragile recovery in confidence was well and truly over.
Particularly telling was the heavy losses seen in the stock prices of a number of high-profile European banks.
Given that this occurred after the imposition of the short selling ban, this seemed to indicate that this was something more than just a speculative attack.
Tellingly, the euro began to come under pressure as well.
With gold now at $1,849 an ounce and the Italian stock market under renewed pressure this morning it feels that we are not the only ones that have concluded that we are at (or very close to) the tipping point.
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