The Australian sharemarket pared yesterday's rally after rumours of a large scale infrastructure stimulus plan in China were quashed, pushing the Spanish and Greek sovereign debt crises back into the market spotlight.
However, with expectations of stimulus from either the US Federal Reserve or the European Central Bank remaining high, in addition to a string of domestic rate cuts, the S&P/ASX 200 index finished well off the day's lows, 20.2 points, or 0.49 per cent, off at 4094.2 points.
Despite persistent expectations that the Fed would eventually step in to revive growth with a third round of quantitative easing, the US dollar rallied against most risk assets on another wave of safe-haven demand.
Overnight Chinese news agency Xinhua said there was no plan for another "massive" stimulus plan and current efforts for stabilizing growth would "not repeat the old way of three years ago".
Sentiment was also knocked by reports that the ECB would not accept Spain's plan to issue government bonds in exchange for ECB funding to bailout embattled bank, Bankia. The news left investors wondering just how Spanish banks could be recapitalised without crushing their share prices or fanning fears of collapses that would trigger bank runs.
On Wall Street stocks ended over one percent higher despite a plunge in consumer confidence and a drop in the Dallas Fed activity index.
The Shanghai composite index was off 0.1 per cent at the close of the ASX while Japan's Nikkei index was down 0.4 per cent.
The Australian dollar fell 1¢ from its overnight high to US97.90¢, with a 0.2 per cent fall in April retail sales, the first decline in 10-months, raising rate-cut expectorations.
Australian government 10-year yields dropped 5.5 points to 3.085 per cent, and the five-years hit a record low of 2.455 per cent, again reflecting the greater caution in global credit markets that equity markets have ignored in recent sessions.
The yield on US government 10-year bonds, part the diminishing pool of "quality" safe-haven assets dropped to 1.72 per cent, just 5 points off its record low, while on the other end of the scale, Spanish 10-year yields were steady at 6.45 per cent, not far off the 7 per cent tipping point that pushed Greece, Ireland and Portugal into bailouts.