The sharemarket started the new year with a bang as US politicians agreed on a budget deal to avoid the worst of the so-called fiscal cliff, which had threatened to derail the world's biggest economy.
The benchmark S&P/ASX 200 closed up 1.2 per cent at a 19-month high of 4705.9 on the positive outcome. Shares were also buoyed after better Chinese manufacturing data helped lift commodity prices.
The value of shares traded was $2.3 billion, a little more than half the 2012 daily average of $4.1bn, as many brokers and investors remained on holiday.
"This removal of the fiscal cliff threat provides a positive backdrop for Australia," said Shane Oliver, chief economist and head of investment strategy at AMP Capital Investors.
He said sharemarkets worldwide would gain from the consequent pick-up in the US economy, alongside improvements in China and Europe.
"Asian markets have sprung to life on the first trading day of 2013, with big gains across the risk space," IG market strategist Stan Shamu wrote in a research note.
The S&P/ASX 200 climbed 14.6 per cent in calendar 2012 as the US recovery showed signs of strengthening and China's economy appeared to rebound from a partially engineered slowdown. The advance almost erased two straight years of losses for the index, which had been driven in large part by concerns over Europe's sovereign debt crisis.
BHP Billiton rose 2 per cent and Fortescue Metals surged 5.8 per cent after spot iron ore added 3.9 per cent on Monday. Woodside Petroleum gained 1.5 per cent after a 1 per cent rise in Nymex crude, while Newcrest climbed 3.6 per cent after spot gold advanced 1.2 per cent.
Commonwealth Bank led the major banks with a 0.9 per cent rise, while QBE Insurance increased 3.7 per cent. Traditionally defensive stocks were mixed, with Telstra up 1.6 per cent and CSL falling 0.4 per cent.
Making news, Gindalbie Metals said it had shipped its first cargo of magnetite from the Karara iron ore project in Western Australia after extensive delays. Gindalbie climbed 10 per cent or 2.5c, to 27.5c.
Yesterday's S&P/ASX 200 gain, the biggest in five months, capped an 8.5 per cent rally over the past seven weeks. That followed a four-week sell-off from mid-October to mid-November as investors fretted over the looming fiscal cliff in the midst of the US presidential election.
Congress broke a rancorous stalemate by passing legislation that blocked most impending tax increases and postponed spending cuts, largely by raising taxes on upper-income Americans. That ended a torturous drive by congress to avert the fiscal cliff, a journey that ended up technically breaching the January 1 deadline.
Dr Oliver said the removal of the fiscal cliff threat considerably brightened the outlook for Australia's economy and sharemarket, at a time when a fading mining boom was widely seen as having dampened the resource-rich country's prospects. The S&P/ASX 200 was likely to reach 5000 this year, he said.
