The benchmark S&P/ASX 200 index and the broader All Ordinaries Index each closed 0.15 per cent higher to 5769 points and 5811.5 points, respectively.

"A relatively flat day on the market with the index confined to an unusually tight 20 point band," said Romano Sala Tenna, portfolio manager at Katana Asset Management.

Investors poured into industrials, consumer staples and healthcare stocks on Wednesday, while miners and utilities were sold off.

A dive in iron ore futures weighed on the likes of Rio Tinto and Fortescue Metals, which closed down 1.3 per cent and 4.8 per cent, respectively.

Investors were initially pleased with BHP's decision to look into the sale of some of its US shale assets, but sold off during the afternoon and the share price closed 0.6 per cent lower.

Three of the big four banks have now broken below their 200-day moving average and only Commonwealth Bank of Australia finished marginally higher on Wednesday, while ANZ, National Australia Bank and Westpac all finished in the red.

The banking sector has more downside risks than upside due to stretched valuations, rising cost of funds, low credit growth and the bank tax that is likely to increase over time, Blue Ocean Equities said in a note.

Gains in industrials were led by testing services provider ALS, which rose 12.8 per cent after a particularly positive full-year result. Citi promptly upgraded the testing services company from a "sell" to a "buy".

Pallets and container group Brambles also underpinned gains in industrial stocks, rising 1.9 per cent.

Amid improving global sentiment, investors dumped safe-haven gold holdings. After a solid increase on Monday, the price of bullion has given back all of its gains and was fetching $US1252 an ounce in late afternoon trade.

St Barbara was one of the hardest hit gold stocks in the sector-wide selloff. The stock plunged 6.2 per cent, while Newcrest Mining, Australia's largest gold producer was off 3.6 per cent.

Stock Watch: Sigma Healthcare

Shares in pharmaceuticals group Sigma Healthcare plunged 31.2 per cent after the company revealed it has launched legal action against industry behemoth My Chemist, which owns the Chemist Warehouse brand and warned it may need to adjust profit forecasts. Sigma said that it had launched the action after My Chemist, which is backed by Rich Listers Jack Gance and Mario Verrocchi and operates more than 300 stores around Australia, said it would start purchasing medicines from a different wholesaler. Sigma said the commencement of legal action, combined with a subdued start to its 2017-18 fiscal year, may mean its annual underlying earnings before interest and tax will fall by 5 per cent from 2016-17. Sigma shares have almost halved since touching $1.53 on December 2016.

Market movers

China downgrade

Moody's issued a shock credit downgrade to China, lowering its rating one notch from A1 to AA3. The downgrade reflects expectations that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise, the ratings agencys said. "From a macro perspective, a downgrade by rating agencies could potentially erode the financial soundness of China, creating the risk of a negative feedback loop," said ANZ economist Khoon Goh. "The downgrade will likely lift the cost of financing of Chinese issuers, especially in the offshore market."

Aussie dollar

The Australian dollar was hit harder than other currencies by China's ratings downgrade. The Aussie slipped nearly 0.5 per cent to as low as US74.43?? and was trading just above that level in late trade, away from a three-week peak of US75.17?? set yesterday. "The Aussie reaction is not necessarily a direct economic response, it's more a sentiment response," said Annette Beacher, chief macro strategist, FX and rates at TD Securities, adding that anything bad for China is seen as bad for Australia. The currency has a reputation for being the forex world's favourite proxy for China's economic fortunes.

GDP weakness

Economic growth of 3.0 per cent is likely in 2017 but prospects for 2018 are "discouraging", Westpac says. The Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, fell in April. Westpac chief economist Bill Evans said the index had been at or above trend for nine consecutive months, indicating economic growth in 2017 will be close to the Reserve Bank's forecast of 3.0 per cent - but a contraction in housing construction, slowing export growth and weak wage growth could bite in 2018.

Iron ore futures

Chinese iron ore futures dropped more than 5 per cent, the steepest single-day drop in more than two weeks, on supply concerns as stocks of the steelmaking raw material at the country's ports rose to the highest level in at least 13 years. The decline also tracked losses in Chinese steel prices after they climbed to nine-week highs on Monday. Iron ore "supply is bearish" with the expected pickup in imports, said Hui Heng Tan, analyst at Marex Spectron. "The continued destocking of imported ore by mills is expected to provide headwinds for prices."