The sharemarket notched up its biggest gain for five weeks yesterday as the banks led broad-based gains thanks to lower-than-expected domestic inflation data and stronger offshore markets.
The consumer price index rose 0.4 per cent in the March quarter, undershooting market expectations of a 0.7 per cent rise. On an annual basis, headline CPI rose 2.5 per cent, leaving inflation comfortably within the central bank's 2-3 per cent target range.
At the close, the benchmark S&P/ASX 200 was up 86 points, or 1.7 per cent, at 5102.4 after hitting as high as 5103.6.
Charts showed an inverse head-and-shoulders pattern, targeting the year's high at 5163.7.
Share-trading value worth $7.5 billion was inflated by activity relating to Tuesday's expiry of equity options.
The index hit a five-month low of 4983.7 this month as commodity prices fell after economic data from the US, China and Europe suggested the global economic recovery was faltering.
But in a positive sign, Europe's STOXX 600 rose 2.3 per cent early yesterday, its biggest rise in eight months, as weak manufacturing data fuelled expectations of another rate cut by the European Central Bank.
The S&P 500 index in the US jumped 1 per cent as US home sales beat expectations and several major companies announced plans to increase dividends.
Japan's Nikkei 225 soared 2.1 per cent before the Bank of Japan's monetary policy meeting tomorrow, while in China the Shanghai Composite was up 1.3 per cent late yesterday.
"It's all about central bank watch across the world at the moment," said IG market strategist Stan Shamu. "The jump in European shares shows what can happen when interest rate cut speculation gets going."
White Funds Management managing director Angus Gluskie said benign domestic inflation increased the chance of an interest rate cut by the Reserve Bank.
"It means there's no impediment to the RBA taking further action to stimulate the economy, and it boosts the attractiveness of high-yield shares as bond yields continue to fall," Mr Gluskie said.
The RBA is due to hold its next policy-setting meeting on May 7, one week before the federal budget on May 14.
Major banks rose 2.2-2.5 per cent as 10-year bond yields hit a five-month low of 3.1 per cent, boosting the relative attractiveness of high-yielding equities.
Elsewhere, Suncorp, AMP, IAG and Macquarie Group rose 1.6-3.8 per cent.
Diversified resources attracted bargain hunting after recent steep falls on the back of commodity price falls, with BHP Billiton and Rio Tinto up 1.1 per cent and 1.6 per cent, respectively.
But gold and iron ore miners continued to struggle, with Silver Lake Resources, Fortescue Metals and Atlas Iron down 4.2-6.8 per cent after spot gold and iron ore prices both fell 1.9 per cent in early offshore trading.
Domestic airline Virgin Australia nudged up 0.5c to 46c after Singapore Airlines lifted its stake in the airline to 19.9 per cent, from 10 per cent.
Publisher APN News & Media firmed 2.5c to 37.5c after it said it was restructuring its digital and regional divisions' management as it tries to combat the decline of the newspaper industry.
The dollar slipped during intraday trading in Asia as the tame inflation data revived talk of interest rate cuts in coming months.
At 5pm AEST, the dollar was $US1.0246, up US0.13c but well off its earlier high of $US1.0277.
"We still expect the Reserve Bank to cut twice by 25 basis points by the end of the year, with our June call looking good at the moment for the first one, and a risk it will occur in May," said Rob Henderson, head of Australian economics at NAB.
The sharemarket will close today for Anzac Day.