Bargain hunting in defensive stocks remained in force as the Australian sharemarket pulled back from an opening one per cent fall, despite the Reserve Bank slashing its 2013 growth forecast.
The S&P/ASX index initially matched the one per cent fall on Wall Street last night as the US budget showdown knocked bullish sentiment, but it rallied to close 21.8 points, or 0.49 per cent, down at 44.62 points.
The Reserve downgraded its growth outlook to 2.25 per cent to 3.25 percent in 2013, lower than its August estimate of 2.75 percent to 3.25 percent.
The statement said lower investment in iron-ore, coal and natural-gas projects and the governments pledge to deliver an election-year budget surplus restrain the economy, and cited Australian dollar strength - even as commodity prices dropped last quarter - as a factor in decisions by mining companies to put off some projects.
The Australian dollar initially dropped 0.4¢ to $1.0380 on the growth news, but bounced back to $US1.0420 along with the rally in equity markets.
"The Australian dollar...remains uncomfortably high, particularly relative to lower bulk commodity prices, and the leading indicators of employment have sagged," JPMorgan Australia chief economist Stephen Walters said.
The Shanghai composite index edged up 0.1 per cent at the close of the ASX, with tame consumer inflation of 1.7 per cent, a 33-month low, failing to the offset the weak earnings outlook and slack demand reflected in the minus 2.8 per cent producer price inflation.
"October's narrowed PPI contraction reflects improving demand for input and raw materials on the back of China's gradual growth recovery," HSBC economist Qu Hongbin said. "That said, with PPI growth still negative and demand still well below trend, the risk of any subsequent pass-through to downstream sectors should remain manageable."
Japan's Nikkei index was off 0.9 per cent.
Overnight an early rally on Wall Street faded as Treasury bond yields fell on safe-haven demand as investors "fretted" US lawmakers would not strike a "sufficiently meaningful deal" to avoid a significant growth hit to the US economy.
In Europe concerns lingered over Greece, with analyst warned of a "new round of brinkmanship" in Europe over the release of bailout funds and fears the date would be pushed out almost two-weeks to November 6, imperilling the "fragile" ruling coalition.
Fanning the jitters, German Finance Minister Wolfgang Schaeuble said: "We're not out of the woods yet... ...At the moment, I don't see how we can take the decision already next week."
Copper jumped 0.9 per cent to $US7690 a tonne and gold rose $US14 to $US1733 an ounce as the Chinese data raised monetary easing hopes.
Among the banks, NAB fell $1.06, or 4.26 per cent, to $23.81 after it agreed to pay $85 million to settle a shareholder class action over sub-prime losses.
Westpac also fell 76 cents, or 2.93 per cent, to $25.17 while the CBA bucked the trend lifting 64 cents, or 1.1 per cent, to $58.28. ANZ was also 19 cents firmer at $24.56.
Among the big miners, Rio Tinto fell 66 cents, or 1.11 per cent, to $58.69, BHP Billiton fell 21 cents to $34.46 and FMG was off one cent to $3.93.Telstra was flat at $4.11, Woolworths was off five cents to $28.79 and Wesfarmers was steady at $34.30.