Asia Session: Australia Could Be In For A Hard 2012

Friday's risk sell-off during the European and American sessions continued today in Asia, after S&P pulled the trigger on anticipated Eurozone downgrades. Nevertheless, we are more concerned about what this could mean for the EFSF and banks throughout Europe who have the most to lose from the mass ratings cut. The rescue fund could face its own credit downgrade and the banks that hold sovereign debt will have to readdress their cash holdings.

One of the biggest losers today is the Australian Stock market which is down around 1.10% at the time of writing. Australia was one of the only economies to avoid a recession in 2009, due to pre-emptive rate cuts by the RBA, a sharp drop in the aussie, massive amounts of fiscal stimulus, and a huge export boost from China, but this could mean that the domestic economy may not be as prepared to deal with this crisis as other economies that were forced to adapt. Subsequently, is Australia in for a tough year?

Cracks are already showing in the banking sector, with the major banks in the country struggling with high funding costs. Furthermore, household debt to income is among the world's highest above 150%, and Australian trade is highly tied to China, who now accounts for one quarter of the country's exports. Finally, the commodity boom hid a slide in productivity growth, which was well below the OECD average.

This leads us to the question, where is growth going to come from? Recent retail data highlights that consumers are likely to have a fairly cautious year, and the government will be concentrating on delivering promised austerity measures, so the burden will fall on the corporate sector. However, this will inevitably involve mining sector expansion and the excepted relatively weak levels of commodity demand globally could weigh heavily on Australia's resources exports.

Tomorrow's GDP data out of China will be an important insight into the impact that the European crisis is having on Beijing. Consensus estimates are looking for a real GDP growth of 8.7%y/y, down from 9.1% in Q3. A catastrophic figure in our opinion would be a year-on-year figure below 8%, which would likely be felt the hardest in the industrial production sector.

The release of better than expected home loan data out of Australia was drowned out by poor job advertisement figures from ANZ, coming in at 1.4% and -0.9% respectively. Consequently, AUDUSD didn't significantly move following the announcements and was soon taken over by a market wide theme of USD buying, which saw the pair touch last week's low at around 1.2622.