Possible trade war for Europe and China over the car making industry, IPO of British chip designer, and release of European Central Banks interest rate decision.
With many European industries facing severe economic and geo-political headwinds, little have faced as strong a wind as the continent’s car marking industry. For example, German car production has been under significant pressure with the number of cars produced slipping substantially due to rising input costs and other countries (including the US and China) looking to reshore. Given that the car manufacturing industry is estimated to account either directly or indirectly for over 6% of the EU’s workforce, the changing tides have got Brussels particularly concerned.
With much of the world’s new car production involving EVs, there has been an irresistible pivot from German EV manufacturing to Chinese EV manufacturing, not least with high profile companies including Tesla investing heavily into China. With many in Brussels arguing that such a pivot has come as a result of Beijing majorly increasing government support and subsidies for strategic industries (including EV production), yesterday the EU announced that it will launch an investigation into whether China has breached the EU’s anti-subsidy rules. With the pivot already showing signs of hurting the EU’s car industry, some estimates indicate that China’s current 8% share of the EU’s car market could double by 2025.
With commentators indicating that the probe will last the best part of a year, some are speculating on whether it will raise the possibility of a trade war between the two economies.
Nevertheless, as the Economic Times notes though EU officials “say they want to “de-risk” from Beijing without a full-blown economic decoupling” chiefly because China remains of the utmost importance in the supply of raw materials and components for the single market’s manufacturing industry (and of course its car production market). As such, Brussels will need to tread tremendously carefully.
Earlier in the year, China overtook Japan as the world’s top car exporter, just a year after China overtook Germany as the world’s second largest car exporter. Indeed, in May we learnt that China exported 1.07 million vehicles over the course of Q1, following a gargantuan 58% increase from Q1 2022. Much of this rise in production is thought to have come from a rise in demand for electric cars going to Russia, a country whose car industry has been hit by Western sanctions. China has seen the demand for new EV’s rise significantly as the world’s second largest economy tries to decarbonise areas of its economy. Demand for these cars abroad has also lifted production, and as alluded to Tesla have been amongst some of the big names to invest in China, having built a manufacturing plant in Shanghai which exports cars to Europe and Japan. As such, with tensions seemingly rising given the importance of the industry, all eyes now turn to Brussels’ latest move and Beijing’s response.
Today will see the IPO of the British chip designer, Arm on the US Nasdaq. Given that its shares have been priced at $51, the market valuation of $52.3bn would make it the largest IPOs of the year. With Tech-Giants including Google, Apple, Nvidia and Samsung expressing interest, the IPO comes at a time when there has been great interest in chip makers given wider technological and geopolitical shifts. SoftBank has also offered 9.4% of Arm’s stock, which would raise just under $5bn for the Japanese bank, which paid $32bn to acquire Arm in 2016.
At 13:15 today, the ECB will make their latest interest rate decision as many of the 20-member eurozone bloc continue to combat elevated inflation and stagnant growth, as external demand dampens. During the ECB’s Policy Meeting on 27 July, Frankfurt met market expectations in raising rates by 25bps on their main refinancing operations (to 4.25%), marginal lending facility (to 4.5%) and the deposit facility (to 3.75%). Presently, money markets are implying that there is a 65% chance of a 25bps rate hike priced in for the ECB’s decision while also more or less fully pricing in a hike between now and the end of the calendar year. Given that going into this week, markets were pricing in around a 40% chance of a 25bps hike, markets have incrementally upwardly revised their rate expectations throughout the course of the last three sessions.
Though headline inflation (currently at 5.3%) still remains well above the ECB’s target rate of 2%, policy makers are continuing to weigh on soft growth as monetary conditions tighten to levels not seen since 2008. For example, data published on the 7 September showed that Eurozone growth continued to stall over Q2 2023. The 0.1% print came well below expectations of 0.3% growth and followed 0.1% contraction over Q4 2022 another marginal 0.1% expansion over Q1 2023. Stagnant growth from the powerhouses of Germany and France, softened global demand and the geopolitical fall-out from the conflict in Ukraine continue to cause headwinds for Frankfurt.
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