The Australian sharemarket pared an early drop as investors shrugged off weakness on Wall Street and Europe last week in favour of following a surge in Chinese stocks.

The S&P/ASX 200 index dropped 0.5 per cent in early trade but rallied to close 6.1 points, or 0.11 per cent, off at5577.4 on below average volume despite the 0.5 per cent drop on Wall Street on Friday.

The Shanghai composite index was up 2.5 per cent at the close of the ASX after Chinese industrial profits rose 18 percent in June, accelerating from 8.9 percent growth in the previous month.

Chinese sentiment was also boosted by rumours the Shanghai and Hong Kong bourses would be joined, prompting traders to narrow the discount of mainland shares to those trading in Hong Kong.

In Tokyo the Nikkei index was up 0.3 per cent.

The Australian dollar dropped US0.3¢ to US93.85¢ as the US dollar edged higher against most major currencies ahead of the end of US Federal Reserve quantitative easing in October and forecasts US interest rates would start rising early next year.

Government 10-year yields dropped 2.5 points to 3.416 per cent as US10-years lost 3 points to 2.46 per cent as economists again revised their US June-quarter GDP growth forecasts lower.

Offshore markets fell on Friday after Germany's IFO index continued to decline and US June durable goods orders rose 0.7 per cent on the back of strong, usually volatile aircraft orders, but data May's data was revised substantially lower from the previous 0.7 per cent increase to a decline of 1.2 per cent.

Shipments of non-military capital goods excluding aircraft, a number used in the compilation of the quarterly GDP data, fell one per cent in June after a downwardly revised 0.1 per cent decline in May.

Dalian iron ore futures were up 0.8 per cent following a 0.7 per cent rise in the spot price to $US94.30 on Friday.

Copper dropped o.6 per cent to $US7125 a tonne while gold bounced $US13 to $US1306 an ounce.

Trading volumes were low due to a lack of new economic data, and investors are waiting for the release of several major reports from around the world due later in the week, IG market strategist Evan Lucas said.

"There's not a lot of things to think about and do, so you'll probably see a lot of investors sitting on their hands," he said.

Iron ore miners posted gains, reflecting a slight rise in iron ore prices, but Mr Lucas said it was an interesting trend given prices were still at historic lows, and miners have been increasing their production.

Fortescue Metals added 17 cents to $4.75, while BHP Billiton gained 10 cents to $39.10 and Rio Tinto was 27 cents higher at $65.36.BC Iron rose two cents to $3.27 after flagging a rise in its full year earnings, despite the slide in iron ore prices.

In the other major sector, three of the big four banks fell by between 0.3 and 0.7 per cent.

National Australia Bank bucked the trend, adding 10 cents to $34.69 after it sold a slice of its troubled British commercial real estate loans portfolio.

Woolworths lost 12 cents to $35.88 and Coles owner Wesfarmers shed seven cents to $43.21, while Telstra closed two cents lower at $5.43.Construction giant Leighton dropped 55 cents to $22.10 after suffering a 20 percent slide in half year profit.

The broader All Ordinaries index was down 4.3 points, or 0.08 per cent, at 5,569.9 points.

The September share price index futures contract was one point lower at 5,529 points, with 19,773 contracts traded.

National turnover was 1.9 billion shares worth $3.7 billion.

The West Australian

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