The last few days have generated an incredible number of fundamental developments which call for an Australia short. Be it the Australian stock market (EWA), the Australian Dolar (FXA), or specific Australian equities such as Rio Tinto (RIO), BHP Billiton (BHP) and Westpac Banking (WBK). This article will summarily explain why.
Iron ore implosion
I've already covered how iron ore has been crashing in China since the start of July. This is extremely relevant for Australia, given that iron ore represents around one fifth of Australia's exports (source: Department of Foreign Affairs and Trade, "Composition of Trade Australia, 2010-2011"). The negative implications for Australia's terms of trade, economy, currency and select iron ore producers are obvious.
Also relevant, coal represents another 15% of Australia's exports, and coal is also under pressure, especially met coal due to the same motives which led to the iron ore implosion, namely weakness in China's steel production industry, which represents almost half of the world's steel production capacity.
So just here we have around 35% of Australia's exports exposed to a brutal pricing reduction.
Resource boom over
The words are from Australia's Resources Minister Martin Ferguson, "You've got to understand, the resources boom is over." There was some backtracking later on, but these words came as reaction to the delaying of some investment projects by BHP. BHP's projects won't be the only ones to be shelved or delayed, in light of the implosion in commodity prices.
Investment in mining was, along with a real estate boom and mineral exports, the main pillar of Australia's economy. The real estate boom is already dissipating, exports will be hit tremendously by the lower mineral pricing, and now the mining investment boom is in question as well. The consequences for Australia's economy, currency and select equities are obvious - this includes equities outside Australia, such as Joy Global (JOY).
China HSBC PMI plunge
More or less related to the iron ore and coal pricing implosion, HSBC's flash PMI reading came in at 47.8 in August, a 9 month low and indicating manufacturing contraction. Not really a surprise taking into account what's happening to iron ore and met coal prices, but a further indication that China's manufacturing economy is struggling. You cannot have Australia's commodity-led economy on a healthy path with its major customer - China's manufacturing - struggling.
While the Australian Dollar remains near historic highs, a tremendous amount of fundamental developments indicate that the drivers behind the Australian economy have been severely compromised in the last few weeks. It is highly likely that the markets will reflect this new reality in the short term, leading to severe punishment of the Australian Dollar, Australian stock market and select Australian equities.
Additional disclosure: I am short AUD/USD.