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Still in the Woods

12 June 2020 by jbchevrel

In Q1, the sector suffered volumes down around 20%-25% as car demand was hammered, first in China, then in the West. Forecasts are now calling declines in the area of 25% range for the full year 2020, but given the uncertainty which remains, especially around the second order impacts of COVID-19 (-) and government stimulus (+), visibility remains low. Margins also fell sharply even for manufacturers with better margins. BMW guided full year margins to between 0% and 3%, and VW posted a 1.6% margin in Q1. All autos warned of weaker results in Q2. Low margins and leverage may cause auto CDS to underperform going forward, although a cap has been set by policymakers (RENAUL). COVID is not the only headwind for € autos, although it is the biggest one. They also have to comply with EU emission regulations. RV-wise an interesting one is RNO/PGO. RENAUL 5y CDS was 140 ahead of the COVID 1st wave for our market (2/21). It peaked 400 dipped 190 bounced back to ~240 yesterday. This retracement is sharper than PEUGOT. PEUGOT has retraced 44% of the initial widening. RENAUL 65%. Different peaks (330 400) to land roughly at the same level (225 230). The 1:1 RV quickly came from ~0 (EOY 19) to +100 (Apr 20) after spending the previous 2y within [-100 , 0]. And now back ~0.