The Australian sharemarket fell for the second session after a cautious Reserve Bank Board kept rates on hold and cracks appeared in the façade of eurozone stability, sending offshore stocks sharply lower last night.
The S&P/ASX 200 index fell 0.7 per cent at its weakest point but closed 24.8 points, or 0.51 per cent, at 4882.7 points, with a shift towards high yielders trimming losses and the small ordinaries index lagging with a one per cent loss.
The first round of earnings reports offered little to support the bullish outlook, while a jump in the Chinese December PMI services index supported sentiment mid-session
Also easing some of the domestic gloom, the surge in iron ore prices slashed the trade deficit to $427 million in December from $2.4 billion in November.
The Australian dollar slipped 0.4├é┬ó to $US1.04 after the Reserve statement said the tepid inflation outlook and below trend growth paved the way for further easing, but the board was waiting for the full impact of previous cuts to filter through the economy.
Westpac chief economist Bill Evans said two extra months of low rates had not provided the Reserve with much encouragement that the economy was turning.
"In qualifying the recent improvement in financial conditions it is clear that the Board does not believe that the global economy is on a sustained upswing," he said.
Spanish and Italian financial stocks led the rout in Europe overnight, the euro tumbled and bond yields spike higher as the political scandal in Spain and rise of former Italian Prime Minister Silvio Berlusconi reminded investors the two economies and political situations remained fragile.
Royal Bank of Scotland currency strategist Greg Gibbs said the economic data from the eurozone periphery had hardly improved at all since the crisis fell off the market radar.
"It has stabilised at a very weak level of activity and sustained high unemployment.
"The improved financial conditions in the region are helping improve confidence, but the banking system outside of the core countries remains in consolidation mode. Bank lending remains largely in decline or stable at low levels.
"The crisis is at a significant risk of flaring up again especially while the ECB is allowing monetary conditions to tighten, in part through a rising euro," he said.
The US S&P 500 index fell 1.1 per cent with a swathe of stock rating downgrades, including retail giant Walmart, and mixed economic data compounding the eurozone jitters.
The Shanghai composite index was per cent at the close of the ASX, while Japan's Nikkei index was per cent.
Yesterday spot iron ore climbed another $US to $YS154.20 a tonne, while copper lost 0.4 per cent to $US8270 a tonne today.
More to come