LOCAL investors rediscovered their appetite for risk, pushing equities and the dollar higher yesterday after pro-austerity parties won the critical Greek election on the weekend.
The relief rally extended to Europe in early overnight trade, but it proved fleeting.
The euro fell back against the US dollar and the futures market indicated a 50-point retreat by the Dow Jones index.
The 10-year Spanish government bond spiked above the 7 per cent level that proved unsustainable for other countries such as Greece, Portugal and Ireland, forcing them to accept bailouts.
The Spanish and Italian stockmarkets were also underperforming other European markets.
Locally, the resources sector led the gains, with the benchmark S&P/ASX200 up 79.6 points, or 2 per cent, at 4136.9 -- its strongest rise since early January.
Deutsche Bank research sales head Glenn Morgan said the improved sentiment was "all about Greece".
"The election result was as good as could have been hoped so there was a lot of risk-on trade, and the day got stronger as it wore on," Mr Morgan said.
"There's a few more bullets to come from Europe but we dodged one" on Sunday.
The dollar also benefited from the Greek election outcome, gaining almost US1c from US100.16c on Friday to US101.14c.
The consensus, though, was that more good news was needed from Europe before the currency consolidated its gains.
A clearer indication of the likely direction of interest rates will emerge today, with the release of the minutes of the Reserve Bank's June 5 board meeting, at which it cut the cash rate by 25 basis points.
Early yesterday, Spain showed why its banking system needed an urgent, E100 billion ($125bn) in bailout loans last week, revealing that bad and doubtful debts reached a record 8.72 per cent of loans in April.
Deutsche Bank's Mr Morgan said Europe's challenges included recapitalisation of the Spanish banking system.
"What's needed is to break the nexus between the weak banks and the weak sovereigns," he said.
There is hope that a European Union summit at the end of this month will come up with some broad plan for a long-term solution to the debt crisis.
City Index chief market analyst Peter Esho said the copper price rose after the election result in Greece, leading to big gains among miners.
"The sharemarket gains have been driven by a bounce in the materials stocks," Mr Esho said.
"Copper is a good lead indicator and that's providing a boost for a lot of the materials stocks that have been pretty beaten up," he said.
The big resources stocks were among the winners yesterday, with BHP Billiton up 80c, or 2.5 per cent, to $32.64, and Rio Tinto gaining $2.50, or 4.6 per cent, to $57.
Iron ore producer Fortescue Metals Group lifted 19c, or 5 per cent, to $4.97, while Woodside Petroleum rose 91c, or 2.8 per cent, to $33.26.
The four major banks were all stronger, as fears of European banking contagion eased. ANZ Bank was 52c higher at $21.80, and National Australia Bank was 69c stronger at $22.81.
Westpac was up 42c to $20.76, and Commonwealth Bank gained 65c to $51.54.
Mr Esho said the US Federal Reserve meeting tomorrow would be more important than the election result in Greece.
