The benchmark S&P/ASX 200 closed down 0.3% at 4063.9 points after falling to 4030.4, following a decline in China's official manufacturing PMI to 50.4 in May--economists expected 51.5.
Among resources stocks, BHP Billiton, Rio Tinto, Woodside and Newcrest fell 0.7%-3.3%. Industrials and consumer discretionary stocks also suffered, with Campbell Brothers, Seven Group and Seven West Media down 3.6%-6.1%. However, Commonwealth Bank, Westpac and ANZ rose 0.6%-1.3% as several high-profile economists called for interest rate cuts by the Reserve Bank of Australia--banks may have an opportunity to boost their margins if the RBA slashes a key interest rate at next week's board meeting.
Investors were sidelined before Friday's release of U.S. non-farm payrolls data.
Overnight, European Central Bank President Mario Draghi demanded strong and immediate action to contain the euro debt crisis, and the pro-bailout New Democracy party had more support than anti-bailout SYRIZA, according to an opinion poll in Greece. However, U.S. private sector jobs, jobless claims, and Chicago PMI data missed expectations, and the E.U. Commission said there was no possibility of direct bank capitalization from the European Stability Mechanism.
"Europe is still a major concern and plans to deal with the crisis are evolving very slowly at best," said Pengana Capital portfolio manager Tim Schroeders. "Certainly risk aversion is occurring more quickly than Europe's preparedness to act. The flip side is that there's enough bad news to cajole policy makers into some sort of co-ordinated action, but it's hard to justify buying on that basis, particularly since the last two years show those kinds of policy responses have been disappointing in terms of their impact on the real economy. All they've managed to do is support asset prices for a while."
Nonetheless, the Australian share market was proving resilient to worse-than-expected Chinese PMI data, partly because of RBA rate cut hopes.
While many economists had expected a pause in the interest rate easing cycle, after the RBA cut 50 basis points in May, Westpac, NAB and CBA economists called for a 25 basis point cut next week. AMP, Nomura and Bell Potter expect 50 basis points next week.
"I am still forecasting back-to-back 50 basis point cuts," said Bell Potter's Charlie Aitken. "The trend in data, both global and local, has been terrible and the RBA would be wise to take out further insurance ahead of a horrible first-quarter GDP print on June 6."
AMP chief economist Shane Oliver said the Australian share market could fall further in coming months because the euro crisis is "spiralling out of control and euro-zone policy makers are doing what they always do--waiting for everything to go to the brink before acting."
But AMP's Oliver also said shares are very cheap relative to bonds, and further policy stimulus from the U.S, Europe, China should provide some support for the Australian share market for the rest of the year.
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