Banks drive up index before key US Fed meeting

Renewed demand for banking stocks has driven the overall Australian sharemarket higher.

The benchmark S&P/ASX 200 Index closed 34.1 points, or 0.71 per cent, higher at 4825.9.

The broader All Ordinaries Index was up 29.5 points, or 0.62 per cent, at 4805.

Options Xpress analyst Ben Le Brun said banking stocks sparked a terrific turnaround on Monday, pushing the market higher after losses earlier in the session.

"It looks like bargain hunters and traders are ready to take a position prior to the Fed's meeting," Mr Le Brun said.

Local investors are nervous before the US Federal Reserve's policy board meeting on Wednesday, amid speculation the Fed will soon wind back its third round of bond purchases, known as quantitative easing.

"Some traders are starting to question if and when that's going to happen," Mr Le Brun said.

"It might not be on the agenda for at least a couple more months and that's going to be very positive for risk assets across the board."

Investor appetite for higher-yielding banking and telco stocks has continued, and mining shares were sold off amid concerns about demand in China.

In the banking sector, ANZ gained 63¢, or 2.2 per cent, to $28.45, Westpac added 53¢, or 1.8 per cent, to $29.47, Commonwealth Bank lifted $1.37, or 2 per cent, to $68.47 and National Australia Bank was up 54¢, or 1.8 per cent, at $29.92.

Among the miners, Rio Tinto dropped 33¢ to $53.65 and BHP Billiton lost 11¢ to $32.80. Fortescue Metals Group fell 9¢ to $3.25.

Construction company Lend Lease said on Monday it would merge its Australian construction and infrastructure businesses.

The company also said earnings from construction were down, and its shares dropped 70¢, or 7.5 per cent, to $8.65.

The Australian dollar was trading slightly higher at US96.2¢, from US95.94¢

Meanwhile, the bond market was weaker ahead of Wednesday's Fed meeting.

UBS interest rate strategist Andrew Lilley said trading volumes were low. "Most participants will be waiting for the outcome of the RBA minutes on Tuesday and the outcome of the FOMC [the Fed's federal open market committee] minutes on Wednesday night."

The September 10-year bond futures contract was trading at 96.595 (implying a yield of 3.405 per cent), down from 97.635 (2.365 per cent) on Friday. The three-year bond contract was at 97.435 (2.565 per cent) down from 97.475.