Optimism returns but investors tread carefully

The sharemarket had its best run in weeks, gaining an impressive 2.8 per cent, after investors put their risk aversion to one side and returned to equities with relish.

The sharemarket had its best run in weeks, gaining an impressive 2.8 per cent, after investors put their risk aversion to one side and returned to equities with relish.

Positive profit reports from the US and renewed optimism helped to buoy investors who had only last week watched the bourse shed nearly 2 per cent in value.

That optimism was evident on Thursday when the bourse surged by more than $24 billion to close at a two-month high, with resource and energy stocks the obvious beneficiaries.

By yesterday afternoon the Australian dollar was holding at a six-week high against the greenback - around the US104? level - as the June quarter terms of trade data were released. It is trading at near record levels against the euro.

The foreign trade price figures suggested the terms of trade, which is a key indicator for the Australian economy, had stayed in negative territory (the figures showed the import price index rose 2.4 per cent in the three months to June, while the export price index rose 1 per cent).

The benchmark S&P/ASX200 index fell 7.6 points, or 0.18 per cent, yesterday to 4199.1 points.

An IG Markets market strategist, Stan Shamu, said investors appeared to be taking a breather yesterday after a decent run upwards by the overall market during the week. "Today there seemed to be a lack of fresh positive drivers on Asian markets," he said.

"There's just been a lot of profit-taking and quiet consolidation. Investors are happy to lock in some of the gains from the week."

Mr Shamu said it was hard to tell where the next driver for global markets would come from.

He said there were still plenty of issues in focus, including the economic health of Spain, the potential of further economic stimulus in the US and China, and the results of the company earnings season in the US.

Economists were preparing for the release of second quarter inflation data from the Bureau of Statistics.

"Based on our figuring, the QII price data will not stand in the way of a near-term rate cut. But nor will it unequivocally make the case for lower interest rates," the Commonwealth Bank chief economist, Michael Blythe, said.

"The one exception would be an inflation print that suggested a risk of undershooting the 2-3 per cent target band for an extended period."

Among the banks, Westpac fell 10? to $22.85, ANZ fell 16? to $23.07, National Australia Bank fell 9? to $23.99, and Commonwealth Bank fell 78? to $55.12.

In the resources sector, BHP Billiton rose 26? at $31.36, and Rio Tinto rose 3? to $53.39.

Uranium explorer Energy and Minerals Australia rose nearly a cent, at 9?, after it said the granting of a mining licence for its Mulga Rocks project boosted confidence that it would go into production.

Broadcaster Ten Network was 1? higher at 51.5? after it agreed to sell its outdoor advertising business Eye Corp to Outdoor Media Operations for up to $145 million.

Energy infrastructure investor Hastings Diversified Utilities Fund jumped 13? to $2.48 amid expectations that suitor APA Group could increase its hostile takeover offer after the competition watchdog gave the green light to the deal.

Sydney Airport rose 7? to $3.08 after it recorded its best June on record for passenger numbers.