Daimler’s Earnings Warning Spurs Casualties

Escalating trade-related battles between the U.S., its allies, and China have been spurring jitters in the global financial markets, with equity indices generally in the red Thursday amid worries in the auto industry.

German car manufacturer Daimler AG (DMLRY), for example, warned late on Wednesday it will incur “significantly” lower EBIT on its Mercedes-Benz Vans year-over-year, as well as “slightly below” the prior year in its Daimler Group and Mercedes-Benz Cars divisions.

DMLRY said fewer-than-expected SUV sales and higher-than-expected costs at Mercedes-Benz Cars - not completely passed on to the customers - must be assumed because of increased import tariffs for U.S. vehicles entering the Chinese market. The car company noted that the “effect cannot be fully compensated by the reallocation of vehicles to other markets.”

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On top of the tariff-inspired earnings damage, DMLRY also anticipates a negative effect in the second half of the year in connection with the new Worldwide Harmonized Light Vehicles Test Procedure (WLTP) certification process.

WLTP replaces the dated New European Driving Cycle (NEDC) test, and is designed to use real-driving data to measure fuel consumption and CO2 emissions from passenger cars, as well as their pollutant emissions

Moreover, DMLRY expects earnings at Mercedes-Benz Vans to be adversely affected by the recall of diesel vehicles, and anticipates earnings at its Daimler Buses business to be hurt by declining demand in Latin America.

DMLRY’s stock fell nearly 4.25% in Thursday’s intraday New York trading session, along with a 2.76% plunge in Bayerische Motoren Werke (BMWYY), and a 2.34% decline in Volkswagen (VLKAY).

The damage was felt across several global auto manufactures.

Among the casualties in Japan’s auto industry, Honda Motor Corp (HMC) was down more than 1.2%, and Toyota Motor Corp (TM) was off over 1.1%. In the U.S., Ford (F), General Motors (GM) and Tesla (TSLA) each suffered losses of between 1.4% to 2.9% intraday, with The First Trust Nasdaq Global Auto Index Fund (CARZ) and recently launched Autonomous & Electric Vehicles ETF (DRIV) down more than 3% and 1.1%, respectively.

Overall, the S&P 500 (SPX) sank 0.42% intraday to 2755.

DMLRY’s news also compounded market fears about global automakers’ finances, after the U.S. in late May decided to launch a probeinto whether tariffs should be imposed on foreign imports on grounds of national security. 

The move had stirred tensions in the EU, Japan and China – and helped drive down several global carmakers’ stocks – especially among some major German manufacturers, whose shares had dropped around 3% shortly after the news broke.

Widening in some firms’ CDS levels intraday Thursday indicated the market’s perception of the industry’s creditworthiness is likely to falter after spreads generally gapped out over the past three months.

Recent quotes on 5-year CDS spreads on certain carmakers across the U.S., Germany and Japan:

Meanwhile, cash spreads in the consumer discretionary sector widened 2bps on the day Thursday to an OAS of about 105bps, while the IG CDX index – a gauge of investor sentiment investment-grade credit market – widened by almost 1.45bps on the day to roughly 64.5bps.