A strong rally in Shanghai has prompted a surge in the Australia share market this afternoon.

The Shanghai Composite Index has recaptured some of the ground lost in the last month, breaking back above the 2,500 level. Not surprisingly, Australian resource shares have come alive. BHP and Rio are leading a rally across the sector, with all stocks exposed to industrial metals rising. Pointedly, gold stocks have not participated, with Lihir and Newcrest both dropping on the day. The market appears to be suggesting that if Chinese growth is accelerating, the recent slide in the price of the yellow metal will continue.

A short squeeze may be on the cards, as there is no sign of rotation between growth related and defensive stocks. Consumer related and healthcare stocks have held onto gains made this morning, while some growth related industrials that are favoured shorting stocks, such as Seek and Qantas, have boomed. Surprisingly, energy stocks are still broadly softer. Sector heavyweight Woodside remains lower on the day, and Arrow Energy shares are down significantly after going ex-entitlement.