☀️☕️ Red flags in the EV price war

Happy Thursday!

Your MFM team will take a short break tomorrow and return on Monday!

Market Roundup 📊 02-Mar-23

US large-cap S&P 500 closed 0.47% DOWN 🔻
Tech-heavy Nasdaq Composite closed 0.66% DOWN 🔻
Pan European STOXX Europe 600 closed 0.75% DOWN 🔻
HK’s Hang Seng Index closed 4.21% UP ▲▲▲▲
Japan’s Nikkei 225 closed 0.26% UP ▲

— The MoneyFitt Morning (@MoneyFitt)
Mar 2, 2023

📝 Focus

Red flags in the EV price war 🚩

📊 In the Markets

China lift-off

Achtung! 22% Nahrungsmittelinflation

📖 MoneyFitt Explains

🎓️ Purchasing Managers’ Index (PMI)

📝 Focus

Red flags in the EV price war 🚩

Tesla’s industry-high profit margins, driven by its economies of scale and early mover advantage, gives it the flexibility and firepower to turn up the heat on its smaller startup Electric Vehicle (EV) competitors desperately dealing with high costs.

► So the price war Tesla initiated towards the end of last year with 20% price cuts seems brutally timely, coming as traditional legacy carmakers hit their stride with lower priced EVs of their own (most recently, Ford slashed US prices of its flagship muscle car, the Mexico and China-made Mustang Mach-E.)

“The issue we have is that the supply constraint is, by far and away, the biggest constraint”

Lucid CEO R.J. Scaringe (ignoring demand and price competition issues)

► Reports are now coming in from Lucid, Rivian and Nikola, which make luxury sedans, SUVs and trucks respectively, showing demand evaporating for many of their newer products. Lucid reported an 18% slump in reservations in the last quarter and forecast 2023 production to be more than 40% lower than expected by Wall Street’s Finest. Rivian forecast 2023 production a quarter lower than expected, both citing supply chain issues… but, more worryingly, both halted their past practice of reporting current orders, which is a massive red flag. Nikola simply reported that weak demand would not ease any time soon, after delivering just 20 of the 133 trucks it built in the fourth quarter.

Investors closely analysing electric vehicle IPOs in 2021 – Image credit: Our Gang (Little Rascals) / WBD via Tenor

► Lucid, Rivian and Nikola stocks are down 85%, 88% and 97% from the highs reached in 2020/21, with Rivian down 18% on Wednesday alone. The picture is more mixed for the year to date, with Lucid having rallied nearly 40% while Rivian and Nikola kept sliding. EV ETFs DRIV and KARS are down 26% and 43% from their highs. (Sector ETFs typically launch at the height of a stock frenzy.)

📊 In the Markets

The S&P 500 and Nasdaq fell for the second day running after the Institute for Supply Management’s (ISM) 🎓 survey showed US manufacturing contracting for the fourth straight month in February, but amid signs that activity was starting to stabilise. BUT prices for raw materials increased, adding to market concerns that inflation could remain high longer than investors had hoped.

► US Treasury bond yields jumped on the back of this and some “hawkish” comments (meaning more pro-interest rate hikes than not) from two influential members of the US central bank, The Federal Reserve. The yield on 10-year notes topped 4% for the first time since November.

But the fireworks on Wednesday were out in Asia, with the Hang Seng Index jumping 833 points or 4.2% on data showing that China’s manufacturing grew at the fastest pace since 2012 (see below). Bond rating agency Moody’s raised its China economic growth forecast for China from 4% to 5% for both 2023 and 2024.

► In Hong Kong, giant tech stocks led, with Tencent and Alibaba up over 7% and 6% respectively, with EV companies following behind on news the China government would continue to provide buyer subsidies. Geely, Nio and BYD were up 4%, 11% and 6%. Recent short seller target and maker of Ryobi and Milwaukee power tools, Techtronic Industries, continued its slow recovery, but is still a quarter down from where it was a month ago.

China lift-off 🚀

The China economy is rebounding stronger than expected after its abrupt exit from its Zero Covid policies late last year. On top of service sector growth and some stability in the deeply troubled housing market (home sales rose from a year earlier for the first time since June 2021), the vital manufacturing sector is now showing its biggest improvement since 2012 despite falling global demand for exports.

► The official manufacturing purchasing managers’ index (PMI) 🎓 rose to 52.6 in February, from 50.1 in January, with non-manufacturing (services and construction) improving to 56.3, both beating expectations. Any reading over 50 shows growth.

A slight uptick in China – Image credit: Tenor

► Meanwhile, in Japan, private manufacturing PMI fell to 47.7 in February from January’s 48.9, the widest contraction since September 2020, as Japan continues to suffer from high interest rates, a global slowdown and the soaring cost of raw materials along with political pressure amid the cost of living crisis to raise wages. And in South Korea, exports clocked a fifth consecutive monthly decline.

Achtung! 22% Nahrungsmittelinflation

Germany, Europe’s largest economy, shows similar price pressures as Spain and France, with inflation rebounding to 9.3% in February, up from 9.2% the previous month, against expectations of a drop.

► Though energy prices eased slightly after the government’s third relief package, they’re still 19% higher than the same month last year. Food prices were worse, with an increase on the previous year of 22%.

► This added to fears from shocked investors that the European Central Bank will deal with stickier-than-expected price pressures by raising eurozone interest rates higher and holding them there longer. Exactly as the members have been saying for months on end.

“The interest rate step announced for March will not be the last. Further significant interest rate steps might even be necessary afterwards.”

Joachim Nagel, President of the Bundesbank (the German central bank) and one of the ECB’s more hawkish members

► The price of Bunds, German government bonds, fell, sending the 10-year yield, the main benchmark in the region, to its highest level since 2011 with the y-year Bund yielding its highest since the 2008 financial crisis. (The price of bonds moves inversely to the yield, the interest you actually get at the price.)

📖 MoneyFitt Explains

🎓️ Purchasing Managers’ Index (PMI)

The Purchasing Managers’ Index (PMI) is a survey-based economic indicator that measures the performance of the manufacturing, service, and construction sectors of an economy. It is based on a monthly survey of purchasing managers in these sectors, who are asked about various indicators such as new orders, employment, supplier deliveries, and inventory levels.

The PMI is considered a leading indicator of economic activity because changes in the level of business activity tend to lead to changes in overall economic activity. A reading above 50 generally indicates an expansion in economic activity, while a reading below 50 generally indicates a contraction. As such, the PMI can be used to anticipate turning points in the economy and gauge the overall direction of economic growth.

The main drawbacks are that the surveys only cover a limited number of industries and sectors, so may not provide a complete picture of the economy, and are based on the subjective assessments of purchasing managers rather than raw data.

There are several global PMI surveys, including the Institute for Supply Management’s (ISM) PMI in the United States, the Markit PMI in Europe, and the Caixin PMI in China.

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