The ASX may open higher. Picture: Reuters.
The ASX may open higher. Picture: Reuters.

The Australian sharemarket reversed a steep opening drop after the first batch of mixed Chinese manufacturing data showed a marginal improvement but stocks failed to finish in the black after the Reserve Bank left interest rates on hold.

The overnight lead from Wall Street was positive but the S&P/ASX index fell 0.8 per cent at its worst despite some "dovish" comments from US Federal Reserve chairman Janet Yellen, but it rallied along with Chinese stocks to close 5.6 points, or 0.1 per cent down at 5389.2.

The ASX has become closely coupled to China's outlook, shadowing intraday moves by the Shanghai composite, and domestic stocks lifted to the day's high after the Shanghai composite index rallied to a 0.6 per cent gain at the close of the ASX on fresh Chinese stimulus hopes.

In Tokyo the Nikkei index was flat.

The official Chinese PMI manufacturing index edged up to 50.3 points from 50.2 points, sending the Australian dollar and stocks sharply higher, but markets ignored the HSBC PMI survey which dropped further into the contraction zone at 48 points.

Westpac senior economist Huw McKay said the combined surveys made for "unhappy reading" with the official index "stuck at stall speed" and the HSBC index well in the contraction zone with most forward looking components, such as "new orders", pointing to further weakness.

"Overall, the PMI outturn for March s is describing a manufacturing sector that has opened 2014 in weak fashion and is experiencing a pronounced soft patch that has some months to run," he said.

The dollar was firmer over night, rising US0.4¢ to US92.60¢ on a broadly weaker US dollar. It jumped to US93.05¢ after rates were left on hold before dropping back to US92.65¢ as the monetary statement referred to the recent bout of currency strength.

"The Governor didn't go as far as labelling the Aussie overvalued or uncomfortably high, as he has in the past, but he did imply that the currency's recent rally is having an adverse impact on the economy," Forex.com analyst Chris Tedder said. "Also, the market may have been looking for a nod in favour of February's strong employment report and more emphasis on the risks associated with Australia's booming property market, thus the RBA's largely unchanged statement hit the Aussie."

The greenback was dented by Ms Yellen's comment that the US economy needed extraordinary support for some time, noting considerable slack in the labour market.

US government 10-year yields dropped 5 points to 2.72 per cent on her comments, while Australian government 10-years rose 5.5 points to 4.137 per cent.

Gold fell $US9 to $US1284 an ounce, copper slipped 0.2 per cent to $US6630 a tonne and spot iron jumped 4 per cent to $US116.80 a tonne yesterday.

More to come…

The West Australian

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