The Australian sharemarket resumed its slide as the Greek political stalemate kept investors guessing about the country's future in the euro, but rotation into defensive stocks helped the market hold above key technical support.
The S&P/ASX 200 index pared an early one per cent loss to close 30.7 points, or 0.71 per cent, down at 4266.3 points, side-stepping the steep 2 per cent losses notched up overnight in European markets and the 1.1 per cent loss on Wall Street.
After an initial dip below technical support at 4260 points, which marked the uptrend in place since the October low, the index recovered to close marginally above support, but it has now established a firm close well below the 50-day moving average at 4304 points. The key 200-day moving average support is at 4215 points.
After easing to a fresh six month low of US99.45¢ the Australian dollar climbed to US99.95¢, helped buy offshore demand for Australian government bonds and German March-quarter GDP growth of 0.5 per cent that outsripped forecasts for 0.1 per cent..
Safe-haven demand pushed 10-year bond yields down 5.3 points to a record low of 3.23 per cent, despite the Reserve Bank minutes failing to provide insight into policy moves.
Overnight German 10-year yields hit a record low of 1.46 per cent, while Spanish yields soared 22 points to 6.23 per cent and Italian yields climbed 20 points to 5.70 per cent after Moody's downgraded 26 Italian banks to a negative outlook.
The European Central Bank also revealed Spanish banks required billion in funding as they continued to be shut out of interbank markets.
The US dollar extended gains against most risk assets, with copper extending its 2.2 per cent overnight fall, losing another one per cent to a four-month low of $US7763 a tonne,
Spot iron ore prices followed base metals lower, slipping $US1 to $US136.70 a tonne, down from $US149 in the past three week on the increasingly gloomy Chinese growth outlook.
"So while participants are now openly discussing an exit from the euro from Greece, and there is a rising complacency about the potential benefits this might bring; the contagion negatives remain," National Australia Bank currency strategist Emma Lawson said. "It is these risks driving the present volatility in markets."
In a client note Patersons analyst Kien Trinh said the ASX's higher than average correlation to Germany's DAX index indicated that the risks to Australia's market would continue to be dictated by the risks of global markets.
"In the medium term, momentum indicators have yet to fully unwind from overbought levels. In fact, volume to the downside has yet to rise to levels which normally precede a market trough" he said.
"At the sector level, there is still strong demand for defensive stocks in property, telecoms, staples, and healthcare.
"We are now looking for a bottoming window for this correction within the next few weeks, and believe the recent market weakness is more reflective of a correction rather than a fully blown bear market," he said.
The Shanghai composite index was off 0.9 per cent at the close of the ASX as foreign direct investment fell 0.7 per cent in April, and Japan's Nikkei index was also off 0.9 per cent.