SHARES climbed yesterday following a rally in Japanese stocks and as some analysts saw potential for the Reserve Bank to cut interest rates next month.
The benchmark S&P/ASX 200 closed up 0.7 per cent at a two-day high of 4966.6. The index fell 1.6 per cent last week as resources dived after spot gold suffered its biggest decline in three decades.
Share trading was relatively light due to school holidays in NSW and ahead of Thursday's Anzac Day break. Value fell to $3.3 billion, versus $4.5bn on Friday and the 20-day moving average of $4.1bn.
Resources heavyweights BHP Billiton and Rio Tinto rose 1 per cent and 1.5 per cent respectively, while Woodside Petroleum gained 1.5 per cent and Santos climbed 2.2 per cent.
The gains in resources stocks came as Japan's Nikkei 225 rose 1.7 per cent on a weakening yen after the Group of 20 leading nations agreed at the weekend that Japan's massive monetary easing was needed to boost its economy, even though the country also needed to spell out structural reforms to further aid growth.
"The lack of any negative rhetoric aimed at the Bank of Japan from the weekend G20 meeting has provided the market with a fresh green light to sell yen, and thus predictably push the Nikkei to new highs," IG chief market strategist Chris Weston said.
Banks managed respectable gains of 0.3-0.9 per cent for the majors and 1.6-1.8 per cent for the regionals, as the market looked to upcoming dividend payments, particularly in light of the potential for further rate cuts here.
"The yield trade, even though it looks tired, hasn't gone away," says Patersons investment adviser Peter Morgan. "The recent collapse in resources is making it more likely that the RBA will have to cut rates again, because our currency should be a lot lower in this environment. Iron ore prices are still at boom-time prices, but copper had its worst week in a long time. That indicates that worries about China's economy continue."
London Metal Exchange copper fell 1.4 per cent yesterday. The 5.6 per cent fall in copper last week was the biggest one-week decline in the metal in the past 16 months.
"The sell-off in copper is quite concerning, as this could be a leading indicator for the global economy and as such eventually lead to a possible correction in equity markets," said Rivkin Global Analyst Timothy Radford.
"So we will be watching this space very carefully, given the long skew our clients have to Australian and US equities at the moment."
The market will get a forward look at China's economy today when HSBC's preliminary manufacturing purchasing managers' index for April is due for release.
"There's no doubt the broader weakness in commodity prices is bad news for Australia, particularly as we are yet to feel the effects of the peak in the mining investment boom," AMP Capital chief economist Shane Oliver said yesterday.
"That's why Wednesday's inflation data are so important. An underlying quarterly inflation outcome of 0.4 per cent or less would well and truly leave the door open for another interest rate cut and could potentially bring forward an easing to May."
Mr Oliver said another interest rate cut would boost demand for high-yield equities while potentially undermining the Australian dollar, thereby lending some support to resources stocks.
OZ Minerals shares fell 11 per cent after the miner lowered its 2013 copper production guidance following a slippage in overburden material -- the rock that sits around the mineral deposit -- at its Prominent Hill mine.