THE sharemarket closed firmer amid optimism about the US tackling its deficit problems but underperformed compared with offshore leads out of America and Europe.
At the close, the benchmark S&P/ASX 200 Index was up 24.3 points, or 0.56 per cent, at 4385.7, while the broader All Ordinaries rose 24.9 points, or 0.57 per cent, to 4,407.5.
CMC Markets trader Ben Taylor said he thought investors were wary about how close US politicians were to resolving the country's deficit problems.
"The equity market seemed to be calling the fiscal cliff situation almost resolved, but I wouldn't be surprised to see a bit of a fall leading into Thanksgiving (on Thursday)," Mr Taylor said. "The US were up 2 per cent, we are only up 0.6 and the bond market isn't really buying it, suggesting they're taking a bit more of a cautious view."
The fiscal cliff refers to a looming US budget deadline, with tax measures and government spending cuts due to come in from January unless politicians can agree on a long-term debt reduction plan.
Mr Taylor said he thought some of the volatility this week involved traders buying stocks to cover short positions - stocks they had sold believing prices would fall.
"Quite a number of people with short positions were getting a little bit worried that the market looked like it could jump and I think this is really short covering pushing this market higher," Mr Taylor said.
One example was Origin Energy, whose shares were punished less than a fortnight ago, sinking to four-year lows amid a profit downgrade and debt worries. Yesterday they leapt more than 3 per cent for the second consecutive day, closing 33? higher at $10.58.
Mining stocks were the best performers, rising more than 1.3 per cent, which market watchers believe have been oversold on the fiscal cliff concerns.
BHP Billiton was 33? higher at $33.58, while Rio Tinto rose 77? to $57.48. The biggest gold company on the bourse, Newcrest Mining, climbed 24? to $25.24.
Shares in engineering firm Monadelphous shot up after it bucked the trend of other mining services companies. The company, which is also exposed to the infrastructure sector, said it expected its first-half sales revenue to grow by 40 per cent due to record levels of new construction work. The shares closed up $1.24, or 6.12 per cent, at $21.50, but are still well below the $24-plus levels of April.
National turnover was 1.3 billion securities worth $3.4 billion.
Meanwhile, the Australian dollar gained ground on more positive sentiment around Europe and the US. Late yesterday the currency was trading at US104.14?, up from Monday's close of 103.67?.