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Market rallies on China bond speculation

BROAD-BASED gains on the sharemarket yesterday recouped part of Monday's heavy losses, amid speculation China was seeking to buy into ailing European banks.

BROAD-BASED gains on the sharemarket yesterday recouped part of Monday's heavy losses, amid speculation China was seeking to buy into ailing European banks.

The market rose more than 1 per cent in early trade, following a late rally in US stocks triggered by a Financial Times report about China's moves to buy Italian bonds.

Local shares then pulled back somewhat, with the benchmark S&P/ASX 200 Index closing up 34.2 points, or 0.85 per cent, at 4072.7.

Trading volumes were slightly below average, with turnover of 2.08 billion stocks, worth $4.8 billion.

"There's not a huge amount of conviction," CMC Markets chief market strategist Michael McCarthy said.

He said investors were being cautiously optimistic about China's discussions with Italian authorities, with the potential for Chinese investment houses to take on some of the impaired exposures in European banks.

Italian authorities had responded to the Financial Times report, saying bonds were not the primary focus, Mr McCarthy said. "One of the suggestions that keeps coming up is there may be appetite from Chinese investment houses to take stakes in European banks at the share prices we're seeing at the moment," he said.

He said an example of such a bank was France's Societe Generale, which had lost more than 50 per cent in value since August 1.

Mr McCarthy said Chinese investment in European banks "would be a major positive . . . but we're being very cautious because it looks very much like a magic bullet".

If the speculation was correct, it would take some time to determine where and how China would invest, Mr McCarthy said.

Energy stocks outperformed, with the sector up more than 2.5 per cent, compared with Monday's 5 per cent fall.

Origin rose 49?, or 3.9 per cent, to $1, Oil Search advanced 21?, or 3.6 per cent, to $6.05, Santos put on 30?, or 2.8 per cent, to $11.21 and Woodside gained 57?, or 1.8 per cent, to $33.14.

The best performing stock on the S&P/ASX 100 Index was engineering company WorleyParsons, up $1.18, or 4.8 per cent, to $25.70.

The worst performing company in that index was mineral sands miner Iluka, down 47?, or 3 per cent, to $15.26.

Market heavyweight BHP Billiton finished up 84?, or 2.3 per cent, at $37.29, while Rio Tinto appreciated 70?, or 1 per cent, to $68.90.

At the 5pm close, gold was at $US1826.61 an ounce, down $US4.47 on Monday's price.


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