EU AUTOMOTIVE: ????️ ???????? Volvo Car: Rating Outlook
(VOVCAB; Ba1neg/BB+neg/ - )
Both agencies moved to outlook negative last month. Risks are meaningful for both, although S&P appear to be on hold under the status quo. Much depends on execution of the cost savings program.
- S&P outlined a scenario where Volvo faces 25% tariffs. It sees a 270bp drop in FY25 adj. EBITDA margin with consensus at -320bp. The outright gap is large, so these differences aren’t directly comparable.
- FOCF is seen at -SEK10bn for FY25, with consensus at -SEK9bn. For FY26 it expects -SEK4bn, with consensus at SEK4bn.
- The rater also flagged falling sales in China, with an 8% drop in FY24.
The rating appears to be in danger if tariff impact is worse than the outlined base case, it fails to execute the ambitious cost reduction plan, or a full US ban on Chinese controlled OEMs comes into force in 2027, as proposed.
- Moody’s does not have permanent 25% tariffs factored in, which it flags as a downside risk.
- It expects a low-2% adj. EBIT margin by its definition, with consensus at 3.1%. The rating requires 4%, or more than 150bp improvement. Consensus has 100bp this year and a further 80bp next year.
- FY25 FCF is seen at -SEK14bn excluding tariff costs. It needs to see positive FCF for the rating, which consensus sees returning for FY26.
- Leverage rising above 3x is another potential ratings trigger.
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ECB: QT Progressing Gradually - W/C May 12
Eurozone excess liquidity declined by E16.6bln during the w/c May 12, bringing the measure down to E2.76tln as of last Friday. This means compared to its high of E4.75trn in November 2022, liquidity in the Eurozone banking system declined by around 42%.
- The decline since then has mostly been driven by a roll-off of the ECB's TLTROs (with the TLTRO III programme starting in 2019 with three-year maturities and with the final maturity in Dec 2024) as well as of the ECB's Monetary Policy Positions (MPPs), which are standing at a current E4.05tln combined. Amongst the MPPs, the ECB envisages a further average monthly rolloff of E13.6bln of the PEPP through Dec-26 and of E28.4bln of the APP through Jul-26 (respective f'cast horizons).
- ECB's Schnabel saw back in March that the "European banking system is currently operating with a high level of excess liquidity", and, fairly generally, that "Over the coming years, the reduction of the Eurosystem monetary policy portfolios will further lower the amount of excess liquidity available to banks in the euro area."
- UniCredit commented last week, finding that "excess liquidity is still well above its equilibrium level. ECB disinvestments may have to continue beyond the end of 2026 before pressure on money market rates start to show up".
FOREX: Greenback Sold as FX Catches Up with Long-End Weakness
Phase of bond sales in both Europe and the US starting to be felt in dollar markets - despite initial resilience to the steepening bias for the US curve. EUR/USD is back toward the upper-end of the day's range, but resistance layered between 1.1278-88 stands ahead of any bullish breakout.
- GBP looks through headlines that the UK are freezing free trade deal negotiations with Israel, with GBP/USD now over 30 pips off lows. We noted earlier today that the pair struggles to maintain gains above the $1.34 handle - a level that will remain in focus headed into tomorrow's inflation print - a number we see as particularly consequential for UK monetary policy this year.
- GBP/AUD's RBA tripped gains see the cross hit new daily highs, with prices still some way off more major resistance into the 2.1030 late April high.
EUROZONE DATA: May Flash Consumer Confidence A Bit Stronger-than-expected
Eurozone flash May consumer confidence was a little stronger-than-expected at -15.2 (vs -16.0 cons, - 16.6 prior). The survey collection date was May 1 - May 19, so fully incorporated the latest easing of US tariff tensions (e.g. agreements with the UK and China).
- Country and sub-component level data is not available in the flash release, with more information filtering through in national-based surveys over the coming days.
- The correlation between consumer confidence and actual household consumption data is quite weak. However, weak sentiment has been cited by ECB officials as a downside risk to growth, and will likely be reflected in the ECB's June projections.
