High hopes for further US Federal Reserve stimulus measures tomorrow offset soaring Spanish and Italian borrowing costs, allowing the Australian sharemarket to pare early losses.
Following the short-lived Greek bailout euphoria that left offshore markets little changed last night, the S&P/ASX 200 index initially fell 0.8 per cent before bargain hunting in the major banks and large cap miners lifted it to close 13.6 points, or 0.33 per cent, at 4123.3 points.
Overnight Spanish 10-year yields soared 26 points to 7.15 per cent and Italian yields jumped 15 points to 6.08 per cent as investors signalled growing fears that their debt loads had become unsustainable.
"Spain is the current problem, with yields rising and the upcoming auditors report on banks and housing suggesting more funds are needed," National Australia Bank currency strategist Emma Lawson said.
Sentiment was supported today by new news that the International Monetary Fund's bailout fund had been boosted to $456 billion, with contributions coming from Brazil and China helping to exceed the $430 billion target.
G20 leaders also increased pressure on European leaders to deal with the sovereign debt and banking crisis.
The Australian dollar fell to a low of $US1.0055 on overnight trade but bounced back to $US1.0140 and 80.30 euro cents on Fed stimulus hopes and the Reserve Bank board meeting minutes which revealed the 25 point rate cut this month was done more to ease offshore concerns than stimulate domestic borrowing.
"The rationale seems to have been that there were enough elements of resilience in the domestic figures for the Bank to take some time to assess the impact of past easing on activity, but that with the potential for global tensions to "intensify" precautionary behaviour, the "finely balanced" arguments turned in favour of a cut," Westpac senior economist Huw McKay said.
The US Federal Reserve starts its open market committee meeting tonight, with Cleveland Fed's 10-year inflation expectations of just 1.19 per cent, below the Fed's "informal" 1.5 per cent to 2 per cent target range, seen as supportive of stimulus.
Westpac global head of interest rate strategy Russell Jones said that the Fed had 10 options, including quantitative easing, extending the "low for long rate commitment" and extending "operation twist".
"Overall, the sad reality is that although at the margin they will offer a degree of additional support to the US real economy, none of these alternatives are likely to exert a decisive influence on the economic outlook," he said. "Monetary policy is already close to its limits and we are in, or very close to, a 'Keynesian Liquidity Trap'."
Japan's Nikkei index was off one per cent and the Shanghai composite index was off 0.3 per cent at the close of the ASX.
More to come