EU: Counting CarsNational security investigation into automotive imports: negotiating positions and near-term outcome (slides 3-5)
The US President has 90 days to respond to the Section 232 report, which reportedly includes three options: a) a blanket tariff on autos
and auto parts of 20-25%; b) more targeted tariffs on advanced auto technology (such as electric cars); and c) a combination of the
above.
The negotiating positions of the two sides are far apart, with the widest gap being on agriculture and to a lesser extent cars.
We see a significant risk of escalation given the political timetable and the fact that the EU is unable to respond constructively in the
near term. Our central case is for tariffs to be imposed, but for the EU to benefit from a short-term exemption.
Current terms for vehicle trade (slide 6)
Car tariffs are currently asymmetric: the US imposes a 2.5% tariff on EU-built cars and a 25% tariff on EU-built trucks, but the EU tariff
for US-built cars and trucks is around 10%.
The US has a USD44bn vehicle trade deficit with the EU, equivalent to around 0.25% of US GDP. Gross bilateral trade
(exports+imports) amounts to USD80bn.
Impact of car tariffs on the economy (slides 7-13)
Direct and indirect automotive manufacturing accounts for around 3.3 million jobs, or 1.5% of total EU employment. Germany and the
CEE countries are the most exposed to any hit to the automotive industry.
The US is the main destination for EU car exports, accounting for around 25% of total export demand. However, EU domestic demand
is a significantly larger market, absorbing around two-thirds of total EU car production.
Including second-round effects, we estimate the impact of a 20-25% tariff at 0.1-0.25pp of Eurozone GDP, with some countries hit more
than others – we estimate the impact in Germany at around 0.15-0.45pp of GDP.
The possibility of tariffs adds a substantial headwind to the German and eurozone economies, the former, in particular, suffering from a
shock to automotive production as well as a slowdown in export demand. There is a material risk that auto tariffs through their possible
income and employment effects would deal a blow to confidence, causing a retrenchment of the consumer – the most resilient sector
so far.
Market View: What’s the collateral damageG10 FX
Concerns about an escalation of auto trade tensions seem likely
to weigh somewhat on the EUR in the weeks leading up to the
President’s decision. However, we think an ultimate outcome in
line with our base case where Europe is granted exemptions
would not significantly damage the currency.
BNP Paribas FX Positioning Analysis signals that EUR positioning
is short with a score of -16 (-/+ 50 scale). Given the market is
already short EUR and limited scope for further ECB easing
measures, we would expect the market impact to be relatively
muted barring a worst case scenario where Europe is hit with
broad tariffs on exports and retaliates significantly against the US.
A worst-case scenario like that would likely require some
downward revisions to our EURUSD forecast of 1.25 by year-end.
We continue to favour buying a 6m EURJPY 120 European Digital
to protect against a range of downside risk scenarios in Europe,
including possible imposition of broad US tariffs on European
autos. As noted,we would expect the impact of broad auto tariffs
to be a material negative for Eurozone growth and would
anticipate that damage to the broader risk environment would also
support the yen. The JPY could also benefit if investors believe
concurrent US-Japan auto negotiations would include discussion
of addressing the yen’s current undervaluation.
G10 Rates
The front end of the Eonia curve has already priced in the
scenario of a delayed deposit facility normalisation due the
eurozone slowdown in 2019. However, we believe that an
additional 0.2% negative impact on Eurozone GDP growth due to
an escalation of auto trade tensions would favour further flattening
of the EUR curve up to the 10y area as investors will expect a
more prolonged ECB status quo.
The heavy rate locking flows on the 10y bucket over the past few
months have distorted the Eur swap curve with the 10y bucket
becoming too cheap on the 5s30s curve. We think that the likely
end of those flows in Q1 combined with a scenario of trade
tensions between the US and the EU would lead to a swift
normalisation of the 10y bucket on the EUR swap curve. Hence,
we favour receiving EUR 5y5y swap positions versus long 5y5y
USD inflation or would recommend receiving EUR 10y swap in the
Eur 5s10s30s swap fly on any correction.
Market View: European Autos sector (SXAP)However, note that in order to naturally hedge their FX exposure,
German and Japanese carmakers have made great efforts to
increase their local production in the US, thereby reducing the
volume of cars physically exported from Europe to the US.
We should also note that investors already have a very pessimistic
outlook for this sector, reflected in depressed valuation levels and
the under-performance of European autos versus other European
cyclicals year to date even as equities have rallied sharply following
the Q4 2018 sell-off.
The European Autos sector (SXAP) has already been buffeted by
a perfect storm of negative catalysts since the beginning of 2018,
including:
1.Dieselgate and the resulting disruption to car production from
recertification according to the Worldwide Harmonised Light
Vehicle Test Procedure (WLTP), from which European car
production is only now recovering;
2.More expensive loan and lease finance arrangements following
higher interest rates and credit spreads, particularly in the US,
making zero-rate finance deals a thing of the past;
3.The slowdown in new car registrations in the key US, EU and
Chinese markets;
4.The investment cost of accelerating the development of hybrid
and electric vehicle models.
As a result of these varied drags on the Autos sector and most
importantly on earnings, the valuation of the European autos
sector has fallen to under 7x on a 12-month forward basis, while
the 12-month forward earnings level itself has already declined by
10% since mid-2018, reflecting these drags on profitability (the
autos sector’s EBITDA margin has already fallen from an end-
2017 peak of 13.3% to 12.4% as of Q1 2019).
Were the US to impose more onerous car tariffs on EU car exports
to the US, this would clearly weigh yet further on auto sector
earnings given its heavy geographic sales exposure to the US
(ranging from 17% to 25% of sales for the big 3 German OEMs).
70
80
90
100
110
120
130
201720182019
SXAP Autos price (rebased)SXAP Autos forward EPS (rebased)
Source: Bloomberg, BNP Paribas
Fig 1: PE valuation of the Autos sector has already declined。