Doubts among bulls and bears ahead of a watershed Greek election on Sunday sent the Australian sharemarket in and out of the red before closing as heightened expectations for US stimulus stirred up market volatility.
Overnight European markets closed in the red but the S&P/ASX index tracked the 1.1 per cent rally on the US S&P 500 index to open 0.4 per cent higher. However, selling soon drove it back into the red before Chinese monetary easing hopes lifted Asian markets and the benchmark index closed up 15.1 points, or 0.37 per cent, at 4057.3 points.
Equity markets were supported by a 10 per cent rally on the Athens stock exchange on the increasing expectation that the pro-euro New Democrats would win the election or be able to form a government next week.
Comments by EU and G20 officials that central banks were preparing for coordinated action after the Greek election "if needed" also calmed markets.
However, last night Spanish government 10-year bonds hit a euro-ear high of 7 per cent, the level at which Greece, Ireland and Portugal were forced to request bailouts, before edging back to close at 6.92 per cent.
Italian yields also climbed points to 6 per cent, while German bonds failed to attract safe-haven demand, remaining unchanged at 1.49 per cent as Cyprus appeared to be next in line for a bailout.
"(German) Bund yields have risen, this makes sense as with every increase in bailouts, it is Germany that ends up contributing the most," National Australia Bank currency strategist Emma Lawson said.
"At the end of the process, yields converge, and this needs to be reflected in bunds. So whoever wins in Greece this weekend, the European outlook is not resolved."
Pressure is mounting on Germany to agree to regional eurobonds to spread funding costs, but German chancellor Angela Merkel warned that the country did not have unlimited finances.
"All eyes are on Germany," she told German MPs yesterday. "But we also know that Germany's power is not infinite. So our responsibility as Europe's largest economy is to deploy our strength credibly."
The Shanghai composite index was down 0.3 per cent at the close of the ASX, while Japan's Nikkei index was up 0.1 per cent.
The Australian dollar climbed back above parity to the US dollar on short covering and hopes for US "money printing" stimulus, reaching a high of $US1.0030 before settling at $US1.0010.
More to come