Europe’s automaking wheels are coming off


After a decade-long boom, demand is fizzling on industry and economic headwinds
Chief Investment Office11 Jan 2019
Photo credit: AFP Photo


US

Stocks rose Thursday (10 January) after dipping briefly following Federal Reserve Chairman Jerome Powell’s remarks about shrinking the central bank’s balance sheet.

The S&P 500 Index rallied 0.45% to 2,596.64 as gains in utilities, industrials, and real estate shares overwhelmed weakness in retailers sparked by concerns about a sales slowdown and fears about the potential consequences of the ongoing partial government shutdown. Alcohol distributor Constellation Brands Inc rebounded from Wednesday’s (9 January) decline to lead the benchmark on positive comments from analysts. Macy’s Inc plunged 18%, making it the biggest decliner, after reporting disappointing seasonal sales and earnings.

But to equity investors, Powell’s cryptic comments at the Economic Club of Washington, DC about returning the Fed’s balance sheet to a normal level – which were taken to mean that the central bank will be reducing it aggressively in the near future – were the attention grabber.

“When asked where the Fed’s balance sheet should go from here, he said it should be ‘substantially smaller’ than it is now,” said an investment professional. “I guess we’ll then wait for his next speech so everyone can then ask him what ‘substantially smaller’ means.”

With the S&P 500 having gained more than 5% in a week following dovish comments on interest rates from the Fed, the lack of any concrete details from trade discussions between China and the US has left few catalysts to drive equity benchmarks significantly higher. And as the fight continues over the proposal to build a wall along the Mexican border, which US President Donald Trump visited Thursday to rally support for his plan, worries about the impact of a prolonged government shutdown in America are starting to take hold. – Bloomberg News.

EUROPE

After a decade-long boom, Europe’s automaking wheels are coming off. Demand in the region fizzled late in 2018 due to a combination of emissions-testing bottlenecks and economic headwinds, signalling an abrupt end to years of robust growth. British consumers led the change, and more pain could lie ahead as doubts linger about the UK’s relations with the European Union after it leaves the bloc.

Ford Motor Company took the most aggressive action so far, announcing thousands of job cuts Thursday (10 January) in a broad review of its European business that could include plant closures. Following in Ford’s footsteps, Jaguar Land Rover – Britain’s biggest carmaker – announced 4,500 layoffs, roughly 10% of its global workforce. Both manufacturers are reliant on the UK, the region’s second-largest market. That makes them particularly exposed to the risks of a disorderly Brexit, but all European manufacturers would be affected by disrupted trade flows between Britain and the continent due to the close links between assembly plants and suppliers on both sides of the English Channel.

Globally, the auto industry is already grappling with tougher environmental rules, a costly shift to electric vehicles, and the risk of ride-hailing services luring away consumers. The sudden slowdown of demand for conventional vehicles risks diluting the cash flow needed to fund this transition, while Brexit adds an extra dose of uncertainty in Europe.

Europe’s struggles include a broader economic slowdown, with Germany at risk of slipping into a technical recession after a dramatic plunge in industrial activity late last year. The slump in the region’s biggest economy was partly driven by carmakers battling to adapt to new emissions-testing procedures, which caused production bottlenecks and sales gyrations across the region.

Expectations from the likes of Volkswagen AG and Daimler AG for a demand rebound have not yet materialised. Deliveries in Germany fell 7.6% in December, indicating broader troubles in a market expected to contract in 2019, according to analysts.

China poses another challenge. Trade tensions with the US contributed to Chinese sales last year declining for the first time in two decades. That means the world’s largest car market is unlikely to come to the industry’s rescue like it did in the aftermath of the financial crisis. – Bloomberg News.

The Stoxx Europe 600 Index added 0.34% to 348.88 on Thursday.

JAPAN

Japan’s Nikkei 225 Index rebounded in early-Friday (11 January) trading, rising 0.92% to 20,348.99 after US stocks rose for the fifth straight session.

The benchmark consolidated on Thursday (10 January) as the yen’s strength curbed further rise, and investors remained cautious over the US government shutdown while watching the outcome of US-China trade talks. The Nikkei 225 finished 1.29% lower at 20,163.80. Only utilities rose for the day, by 0.83%. The other 11 sectors fell between 2.86% (consumer staples) and 0.42% (real estate).

Tokyo Electron Limited climbed 2.61% as semiconductor-related counters advanced following a sanguine performance in US peers overnight, Japan Times reported. Meanwhile mobile carrier KDDI Corporation gained 0.79%.

Stocks were down broadly as market participants anticipated a selldown after the US government remained shut, according to the Japan Times. Fast Retailing Co Ltd (-2.14%), SoftBank Group Corp (-3.74%), FamilyMart UNY Holdings Co Ltd (-3.99%), FANUC Corporation (-2.43%), and Kao Corporation (-5.45%) weighed down the Nikkei 225 the most.

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