Daimler Is Trying To Tell You Something. Are You Listening?

If you’re looking for concrete signs that the threat of an escalating global trade conflict is  starting to weigh on the outlook, you’d be hard pressed to find a more disconcerting development than a profit warning from Daimler and that’s just what markets are trying to cope with on Thursday.

After the bell on Wednesday, the company reassessed its projections for earnings and the proximate cause of the newly downgraded outlook is the threat of import tariffs on vehicles the company builds in the U.S. and exports to China. The effect, the company says, “cannot be fully compensated by the reallocation of vehicles to other markets.”

Here’s the update:

• Mercedes-Benz Cars: slightly below the previous year,
• Mercedes-Benz Vans: significantly below the previous year’s level,
• Daimler Buses: in the magnitude of the previous year and
• Daimler Group: slightly below the previous year’s level

“Many SUVs are built in Alabama and then shipped to China,” Bloomberg notes, adding that “those vehicles are now caught up in retaliatory tariffs announced in China in response to President Donald Trump’s levies on $50 billion in Chinese goods.”

Needless to say, that doesn’t bode well for European automakers. Here’s a telling chart which shows how the sharp drop in the euro last week following Mario Draghi’s magic trick catalyzed a sharp rally in the SXAP and where it’s gone since:

Individually:

“[Daimler] guidance cut and target reductions at several divisions are clearly a negative surprise [and] very likely to also weigh on other OEMs shares, though questions [are] still pending whether this is Daimler-specific or an issue for entire industry,” Kepler Cheuvreux wrote in a note on Thursday.

“Remember, for those following from a Trump/global free trade perspective, this is now a German car maker, warning on the profits coming from their Alabama-made SUVs, which are then sold/exported into China —- a complicated situation indeed!!” Evercore’s Arndt Ellinghorst exclaimed.

For its part, BMW said it’s “constantly reviewing possible effects on changing framework conditions on its business” and is now in the process of “evaluating various scenarios and options in [the] context of current discussion on additional tariffs.” The company did reconfirm its 2018 outlook.

You should also note that the above-mentioned Stoxx autos sector is now sitting at its lowest levels since September of last year:

Tellingly, CDS on Daimler, Volkswagen and BMW all widened out:

(BBG)

Never forget…

there are two hilarious parts of this CNBC screenbgrab, both highlighted. pic.twitter.com/K8atd68q19

— Heisenberg Report (@heisenbergrpt) May 31, 2018