Bullish sentiment waned ahead of the much anticipated US Federal Reserve meeting tonight with the Australian sharemarket finishing well off its highs.
The S&P/ASX 200 index rose 9.1 points, or 0.22 per cent, to 4132.4 points, and volume increased 18 per cent above average as investors booked profits, fearing a sharp selloff in the event of the Fed disappointing markets by not announcing plans for quantitative easing.
German officials also denied market-buoying rumours overnight that there had been discussions at the G20 leaders' meeting of a plan to buy Spanish and Italian bonds to contain the eurozone crisis.
Also weighing on the market was the 1.4 per cent fall in the Westpac-Melbourne Institute Leading index, which indicates the likely pace of economic activity three to nine months into the future, to 0.2 per cent in April, well below its long term trend of 2.6 per cent.
Overnight Wall Street climbed one per cent and European markets jumped almost 2 per cent on average after a "successful" Spanish one-year bond auction which saw borrowing costs soar from 2.98 per cent in May to 5.07 per cent.
The slump in Germany's ZEW investor confidence index and weaker than expected US housing starts and jobs vacancies were enough for markets to price in stimulus measures from the Fed and the European Central Bank.
"But this does not address the problem of a lack of demand for credit and the diminishing returns to QE," National Australia Bank currency strategist Emma Lawson said. "With yields presently near record lows, it suggests that it isn't the price that is the problem, but rather demand. We do not expect any change from the FOMC tonight; that would be a surprise for markets and see the US dollar rally and risk assets lower. And then we enter another holding pattern ahead of the rest of the week's events."
Westpac economists wrote in a client report that slack demand for credit was also a problem in China, where bankers' assessments indicated loan demand 12 per cent below average, and lower than the December 2008 reading.
"This combination argues that policymakers are finding it difficult to re-energise demand, despite their willingness to loosen the monetary trammels they imposed last year," they said. "Future confidence in household income levels is also soft in absolute terms, while the preference for savings deposits over active investment rose to another record high.
The Shanghai composite index was down 0.3 per cent at the close of the ASX and Japan's Nikkei index was up 1.2 per cent.
The Australian dollar rose to a six-week high of $US1.0195 as the US dollar weakened in anticipation of Fed stimulus announcement.
However, reflecting growing doubts over whether the Fed would fire up the printing presses, gold fell $US11 to $US1620 an ounce, while copper pared its overnight 1.3 per cent gain, sliding 0.6 per cent to $US7567 a tonne.
More to come