AUSTRALIAN stocks hit their highest point this year and looked to be surging towards the critical 4600-point level after investors piled into mining and engineering stocks, ahead of a predicted stimulus from the US Federal Reserve this week.
The S&P/ASX 200 Index has surged 5.5 per cent since mid-November after shares on Tuesday posted their highest close of the year at 4576 points, boosted by signs of a rebound in the Chinese economy.
The resource sector led gains, with top miners BHP Billiton and Rio Tinto advancing 1.3 per cent and 0.8 per cent respectively after spot iron ore prices hit their highest level since July.
The Australian dollar also held close to multi-week highs on Tuesday, drawing support from expectations of fresh US economic stimulus measures, though investors kept a wary eye on developments in Italian politics. The Australian dollar was trading near an 11-week peak of $US1.0515 set last week.
Renewed optimism in equities contrast with fear gripping global markets midyear on concerns the global economy was facing the twin hit of a slowing China and splintering Europe.
Analysts said investors appeared to be rotating out of the year's top-performing sectors, such as telecommunications and healthcare stocks, and into material names, suggesting they were becoming less risk averse.
Even so, a series of business surveys painted a mixed picture of business confidence, with analysts looking for signs of whether the Reserve Bank would cut rates next year.
The National Australia Bank's survey of 600 firms found business confidence had fallen to the lowest level since the global financial crisis, as business conditions remained weak with little sign of a pre-Christmas revival.
In contrast, Roy Morgan's business confidence survey of 2800 companies was more positive and showed a lift from 114.0 to 116.8 in November, just off the highest level in 10 months.
Gains amid a two-day policy meeting by the US Federal Reserve, where analysts expect it to announce monthly bond purchases of $US45 billion, on top of the $US40 billion in mortgage-backed security purchases in September. Analysts said that the sharemarket could keep rising in coming months, but by the end of next year things would likely have worsened.
It comes at a strained time for Europe, where Italy's borrowing costs jumped and the sharemarket sank as economists predicted the resignation of Prime Minister Mario Monti could plunge the eurozone back into crisis.
The November NAB survey said a strong Australian dollar, fiscal tightening and weak confidence was expected to weigh on near-term activity and allow for a further rate cut possibly in May 2013. The monthly business condition index remained at minus 5, while business confidence fell to minus 9 from minus 1 in October.