5 things to start your day: Europe

Good morning. The European carmakers are losing ground. And Hong Kong sends a gloomy signal to the global luxury sector. The UK halts some a

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Good morning. The European carmakers are losing ground. And Hong Kong sends a gloomy signal to the global luxury sector. The UK halts some arms licenses to Israel. Here's what people are talking about.

Losing ground

It's a rough time for Europe's auto industry. With the continent's efforts to compete with Chinese rivals and Tesla in electric cars faltering, German and French carmakers are heading toward a disruptive wave of factory closures. Volkswagen is considering shutting down plants in Germany for the first time in its 87-year history. With car sales still nearly a fifth lower than pre-pandemic levels in Europe, manufacturers including VW, Stellantis and Renault were operating more than 30 factories at levels analysts consider unprofitable, according to data from Just Auto.

Empty luxury mall

And things are not looking any better for luxury brands. The collapse of high-end spending in China has shaken investor confidence in the priciest goods across the globe, as companies from LVMH to Richemont and L'Oreal report falling sales in the region. Nowhere is the scale of that decline in demand more evident than in Hong Kong, for many years the favored destination for China's nouveau riche to splurge on designer handbags and Swiss watches. Hong Kong's prime shopping districts once commanded the highest rents in the world are now hollowing out as Chinese consumers disappear. Read more here.

Flights canceled

Cathay Pacific canceled almost all its scheduled flights from Hong Kong to Singapore on Tuesday, as well as a raft of other services across Asia, after discovering a faulty engine component on some of its Airbus SE A350s. The company identified the component failure on a plane that was forced to return from a flight originally headed to Zurich on Monday. A subsequent check of the fleet revealed several of the same engine parts needed replacing. The Hong Kong-Singapore service is a flagship leg for Cathay. The airline didn't specify the fault it had found. The engine is made by Rolls-Royce Holdings, whose shares plunged as much as 8.2% Monday. Cathay Pacific's stock fell in Hong Kong today.

Supply disruptions

Oil hovered close to the bottom of recent ranges despite news about Libyan supply disruptions. The African country's state oil firm declared force majeure at the El-Feel field, with an escalating power struggle already halving the nation's output. The disruptions may give OPEC+ the space to restore some production next quarter, as planned. Brent is near $77 a barrel, while West Texas Intermediate traded at just under $74, as concerns about weak demand from China overwhelm the prospect for Libyan supply disruptions.

Arms licenses

Defense-related stocks may garner some attention, particularly in the UK. The country will suspend some arms licenses to Israel after concluding the use of British components in Gaza risks violating international humanitarian law, Foreign Secretary David Lammy said, in a break from allies. The 30 suspended licenses cover components used in F-16 fighter aircraft, helicopters, drones and naval systems, as well as items that facilitate ground targeting. While the UK provides less than 1% of Israel's weapons and is not a state supplier, the Labour government — and the Conservative one before it — have come under increasing pressure to review arms exports.

Coming up

On the data docket, we have Spain unemployment, Switzerland GDP and CPI, as well as France's budget balance. Over in the US, construction spending and ISM manufacturing index are also due. For central bankers, the ECB's Joachim Nagel and the BOE's Sarah Breeden appear. UK Chancellor Rachel Reeves takes questions in the House of Commons.

What we've been reading

This is what's caught our eye over the past 24 hours. GlobalWafers must go global as tariffs rise worldwide: CEO HP to pursue $4 billion damages after Mike Lynch yacht death Brazilian judges ratify ban on X in deepening feud with Musk Rightmove working with UBS, Morgan Stanley after REA interest London workers are in the office just half the week: study T. Rowe manager who predicted yen shock sees another one coming Angry Israelis push Netanyahu's red lines on hostage deaths

And finally, here's what Mary is interested in this morning:

The pound will continue to outperform the euro as yields in the UK remain higher. Nominal yields have taken over as the main driver of the currency pairs, with breakeven rates' influence quickly fading as we enter a new phase in the cycle. As the central banks within the G-10 sphere have set the path towards easing, it is now a matter of how quickly they will reduce interest rates. The Bank of England is expected to move slower than the European Central Bank, with higher yields in the UK keeping the pound well supported. And China risks represent an added blow to the euro. The economic malaise there has been worsening with domestic demand exceptionally weak. Disinflationary pressures coming from the world's second-largest economy is a threat to the euro zone. Importing deflation leaves the single-currency region more likely to cut rates faster than its European neighbor which is much less dependent on the Asian country. The stability of the yuan has helped broader currency markets, but further weakness in the currency -- which is likely if exports are to continue holding up -- will put the euro more at risk than sterling. All this points to further downside for euro-pound. Also, the dichotomy in the political backdrop will favor sterling as risks on that front are flaring up once again in Europe. Mary Nicola is a macro strategist for Bloomberg's Markets Live team, based in Singapore.

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