European Car Sales Plunge 23%, Dragging Market Lower

The global carmageddon wave is spreading: just two weeks after the US reported its worst auto sales in years - now ex dealer incentives, and just days after the latest Chinese data showed passenger-car purchases by dealerships plunged 12% from a year earlier to just over 2 million units in September, the biggest drop on record...

... the auto weakness has hit Europe, where passenger car registrations in Europe slumped 23% during September after new emissions test rules took hold, reversing August gains when automakers were hurrying vehicles out the door to beat the deadline.

Europe's tougher testing methods are designed to produce results more in line with real-world conditions, and come as the industry struggles to regain credibility after it emerged in recent years that virtually every German carmaker was gaming emissions tests.

The new emission test methods in Europe are having an adverse effect on companies like (surprise) Volkswagen and Daimler AG. Both companies have stated that they are going to struggle to meet delivery targets this year because of the new rules, which are designed to produce emission results more in-line with real world conditions. VW hopes to have these emission struggles behind them by the fourth quarter. While BMW hasn’t seen trouble from these emission tests, it issued a profit warning last month regardless. The company blamed pricing pressure from competitors as a headwind.

And while there is the temptation to assume the September slide is a one-time event, Bloomberg Intelligence warned that the emissions tests and tough annual comparisons would add further pressure in 4Q, while diesel and emission compliance continues to squeeze automakers' margins.

Meanwhile, as Bloomberg notes, other headwinds remain:

BMW cited trade tensions in last month's profit forecast cut. The European car lobby is warning on Brexit. And don't forget the parts makers - Goldman sees a “challenging” 3Q for European automotive industry, with potential for downward earnings revisions by suppliers. A spate of positive 3Q results starting next week could help throw sinking valuations in reverse, but trade worries are going to take longer. Sentiment remains negative and investors more inclined to push the sell than buy button for now.

In reaction to these numbers, the STOXX 600 Automobiles and Parts Index is down about 1.8% in trading in Frankfurt...

... with Europe's automakers the worst sector today...

...and dragging the Stoxx 50 in the red, as the early bounce in response to yesterday torrid rally in the US and Netflix's blockbuster beat has fully reversed.