This commentary originally appeared on Real Money Pro at 08:00 a.m. ET on Sept. 23, 2015. Click here to learn about this dynamic market information service for active traders.
What was Volkswagen (VLKAY) thinking? This week, the company admitted that 11 million of its diesel engine vehicles were equipped with software that could be used to cheat emissions tests. Volkswagen announced that it has set aside $7.3 billion to correct the issue, but the price may prove to be considerably steeper.
Volkswagen is by far the dominant automaker in Europe, where diesel-powered vehicles are popular. With fines and lawsuits looming, and with the company's reputation sullied by the deception, we could be seeing the end of the road for the automaker. The company's market cap has declined by over $25 billion during the past week, and technically speaking, further losses lie ahead.
The next support levels for Volkswagen lie at $21.75 (blue line), which marked a major low in late 2011, and $16.25 (black line), which is where the stock ultimately bottomed in 2010 after a steep decline. The massive volume on this week's candle only consists of two days' worth of trading.
While Volkswagen faces an existential crisis, the implications of its potential demise are far-reaching. It's no coincidence that as the company has skidded off the autobahn, the euro has gotten a flat tire. On Friday, the currency opened above 1.14 to the U.S. dollar (arrow); by last night, it was flirting with 1.11.
This matters because in the world of currencies, everything is relative; a weaker euro means a stronger dollar. Therefore, Volkswagen's emission scandal is bad news for U.S. exporters.
Europe's economy is driven by Germany, and exports are the engine of that country's growth. Automobiles and related products, such as auto parts, account for approximately 20% of Germany's exports. Volkswagen and its various brands account for about 10% of all vehicles sold globally, according to Euromonitor International.
Some economists say that the hit to Germany's economy would be negligible, with German GDP losing just 0.2%. According to Moody's, Germany's economy is expected to grow at just 1.5% this year. Even if the 0.2% figure is correct, it's more than Germany can afford to lose.
Can the European Central Bank (ECB) do anything to offset this decline? With its key interest rate hovering just above zero, and with quantitative easing already in effect, the ECB's bag of tricks is just about empty.
Don't expect any help from world's largest auto buyer, China. Last night, the Caixin flash PMI reached a 78-month low. That doesn't bode well for China's economy, or for future demand forEuropean vehicles.
My advice? Fasten your seatbelts.