The benchmark S&P/ASX200 initially traded marginally higher following encouraging leads from Wall Street before closing down 0.2 per cent to 5760.2, while the broader All Ordinaries index finished the day down 0.2 per cent to 5802.8.

Despite a generally upbeat night for commodities markets, resource stocks for the most part didn't hold on to Monday's gains. BHP was off 1.2 per cent, Rio Tinto fell 0.7 per cent, while Fortescue Metals closed down 2.1 per cent after CEO Nev Power warned a Chinese iron ore glut could mean the price would fall further. The ASX200 materials index as a whole was 0.5 per cent lower.

Gold stocks were the exception, with Newcrest Mining closing up 0.5 per cent, Northern Star Resources adding 3.9 per cent and Evolution Mining up 5.1 per cent.

"The situation in Manchester is supporting gold prices at the moment, which is hitting a significant technical level here. Most Australian gold stocks are responding to that," said James McGlew, executive director of corporate stock-broking at Argonaut, referring to an attack at a concert in the British city. The spot price of gold added 0.1 per cent to $US1,262.12.

The impacts of S&P's credit downgrade of small banks on Monday appeared to still be working its way through the market, with Bendigo Bank extending Monday's losses to shed a further 1.6 per cent and Bank of Queensland losing 2.5 per cent.

But the big banks gave up ground too, with Commonwealth Bank down 0.4 per cent, Westpac falling 1.0 per cent, NAB down 0.8 per cent and ANZ losing 0.3 per cent. In the financial sector, non-bank stocks - such as Magellan Financial, up 1.5 per cent, and MacMillan Shakespeare, which rose 1.2 per cent - were well supported, noted Gary Huxtable, client adviser at Atlantic Pacific Securities.

As heavyweights in the resource and financial sector retreated, investors turned to bond proxies.

"We're also witnessing a continuation of the rotation into high-yielding infrastructure stocks," Mr Huxtable added. Sydney Airport rose 0.6 per cent, Transurban added 0.5 per cent and Crown Resorts finished up 1.4 per cent.

The ASX200's biggest loser was Brickworks, down 3.6 per cent. The company is currently in the middle of court hearings regarding a law suit about its cross shareholding with Washington H. Soul Pattinson.

Outside the ASX200, Surfstitch shares continued Monday's dramatic fall, losing another 9.3 per cent after law firm Quin Emanuel's Damian Scattini announced plans to launch a $100 million class action in the Supreme Court of Queensland.

Stock watch: Mirvac Group

Mirvac shares fell 1.8 per cent to $2.25 after Citi analysts led by David Lloyd downgraded the real estate group to a 'sell', with a 12-month price target of $2.11. Citi based the downgrade on risks to residential property volume sales (due to extended settlement times, tightening lending conditions and slowing presales activity), unfavourable market sentiments towards planned master communities and the fact that Mirvac's price was already pricing in strong office conditions. Citi's call is a non-consensus one - of the 13 analysts who cover the stock according to Bloomberg, 10 still have it as a 'buy', with a consensus 12-month price target of $2.38. A May 17 note from Morgan Stanley's John Lee was bullish on Mirvac due to its high office exposure.

Market movers

Concert attack

Pound sterling slipped and the yen rose after UK police said they were treating a blast that resulted in at least 22 deaths at a concert in Manchester as possible terrorism. AMP Capital's Shane Oliver said while the attack was unhelpful for market confidence, the long-term the financial impact would likely be muted. "Financial markets may see a minor short-term negative impact but the experience since early last decade has highlighted that terrorist attacks on targets like buildings and sports venues don't really have much economic impact."

Iron stockpiles

The record heap of iron ore on China's doorstep has only grown, with the increase in holdings this year eclipsing the build-up seen over all of 2016 as mills produced unprecedented amounts of steel. Stockpiles at ports rose 1.3 per cent to 136 million tonnes, expanding for a fourth week. In the first few months of 2017, they rose 22.05 million tonnes, surpassing the 20.85 million added last year. Iron ore has stabilised in the $US60s in recent weeks after sinking in March and April on concern rising global production will top demand.

Asia-Pacific markets

The MSCI Asia Pacific Index had risen 1 per cent as the Australian market closed - adding to gains of 35.8 per cent this year. Tencent Holdings, China's largest internet company, extended gains for the fifth day to trade at a record, lifting Hong Kong's Hang Seng Index to its highest since July 2015. Taiwan's Taiex Index touched its highest closing level in 17 years as Hon Hai Precision Industry Co. and AU Optronics Corp. led gains among electronics companies.

Bond bulls

After staking their biggest bet ever against the $US14 trillion Treasuries market at the start of 2017, hedge funds and other large speculators have had a rapid change of heart on bonds. Net-long positions in 10-year Treasury futures are at the highest level since December 2007, reaching 240,010 contracts as of May 16, US Commodity Futures Trading Commission data released Friday showed. To Wall Street strategists, the reversal signals a lasting shift toward bonds becoming back in favour. Benchmark 10-year yields tumbled last week, turning into a haven from drama around Donald Trump's presidency.