Such situation is impossible. You can store the ownership of the diamond in the blockchain, but you can not use ETH to trade it
This is a peculiar situation as if you wanted to trade Mona Lisa painting. It's not a typical item to trade because there's nothing like it in the world. That's why you don't see those on Amazon.
Each sale of such item would be so unique, that it makes little sense to automatize it in a smart contract. For example, owner of such diamond may accept payments in dollars, gold, yachts, Lamborghinis, islands etc.
He would prefer to control it completely, and probably organize an auction. Because such items don't really have a market value - they are worth exactly as much as the price the buyer and seller agree on at that very moment.
Also, consider what would happen to ETH price in such situation: first the potential buyer buys all of existing ETH, and the price soars like crazy to match the diamond price. Then the purchase is made, and imagine that the new owner values JPY more than ETH. Now he has a problem.
He can dump everything, but there's probably nobody willing to buy that much at once (unless there's a second diamond like this on sale at the moment?) so the prices would be dropping.
Theory of money
I remember from economy classes I took (although I can't find a source right now) that
The value of all money = the value of all things you can buy with that money
This is worth thinking about... (also note that value != price)
In your example, if we assumed that ETH is the only currency anyone believes in, it's cap would be
value of everything in the world that can be bought = all ETH in circulation
But then - a diamond worth more than all ETH in circulation is impossible by definition.
The ultimate aristocrat, pharaoh of the known world
The situation would be similar to somebody owning every continent, and ocean, and person and aminal in it, and the extractable resources, and the labor of every being. Such person would not need ETH at all - he owns the world, and no one can buy it from him, therefore such smart contract would sit there in the blockchain never to be used ;)
Also, if you want to understand money better, read the first chapters of https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years