The benchmark S&P/ASX 200 index ended the day down 28 points, or 0.5 per cent, at 6048 while the All Ordinaries lost 21 points, or 0.4 per cent, to stand at 6165. The Australian dollar kept the key US80c level in sight, trading at US79.70c.

The ASX has lost 0.3 per cent so far this year but Morgans strategists see upside for the Australian share market.

"Earnings are beginning to recover from a long flat period. That recovery in earnings, together with a very liquid international capital market, should support a stronger outlook for Australian equities," the strategists noted. "We estimate fair value for the ASX200 is now 6200 points. We believe the ASX200 will reach that level no later than April 2018."

Miners pulled back after iron ore futures fell 2 per cent the previous day when data indicated there are record stockpiles of imported iron ore at Chinese ports. BHP lost 0.8 per cent to $31.66, and Rio Tinto turned back from early gains made after releasing its latest production numbers to trade down 0.7 per cent at $81.26.

The Morgans strategists remain positive on the commodity sector, saying traditional investors remain under-exposed to commodities. "We think that investors can safely position in our sector favourites (BHP, Oil Search and OZ Minerals) to gain exposure to the upside scenario for global growth."

In the energy sector, Origin Energy lost another 2.7 per cent to reach $9.15, extending losses from the previous session when it was downgraded by UBS, while Woodside fell 1.9 per cent to $33.82.

Banks were also on the backfoot on Tuesday, with CBA losing 0.7 per cent at $80.58 and Westpac down 0.8 per cent at $30.82. Fitch Ratings warned that Australia's major banks are facing a tougher grind in the year ahead, as charges for bad loans creep up from record lows and as the lenders are put under the microscope of a royal commission.

On the plus side, Bellamy's shares surged 24.8 per cent to $13.68 after the infant formula maker upgraded its earnings guidance, citing better-than-expected sales in China.

Rival infant milk powder maker A2 jumped 6.5 per cent to $7.42, while vitamins firm Blackmores rose 6.2 per cent to $159.11.

BT Investment Management climbed 3.2 per cent to $11.57 after telling shareholders that its funds under management rose $2.3 billion to $98.1 billion in the three months ended December 31.

Perpetual shares were also stronger, trading up 2.6 per cent to $52.38.

Afterpay Touch surged 16.9 per cent to $7.625 after the-buy-now-pay-later service revealed its underlying annual sales are on track to reach more than $2 billion and a possible move into the US market.

- With wires

Stockwatch - Perpetual

Perpetual shares rose 2.6 per cent to $52.39. The firm told investors on Monday that funds under management for Perpetual Investments climbed $1.8 billion to $32.8 billion during the final quarter of 2017. "Net outflows remain negative although these were absent the chunky institutional outflows seen in several previous quarters, at just $200 million, down from $700 million in the previous quarter," noted Citi analysts. "This perhaps provides some cause for optimism for flows in future quarters, although recurrence is still possible."

New car sales

Australian sales of new vehicles surged by the most since 2012 in December to hit record highs for the month and the year, adding to signs of a pick up in consumer spending after a prolonged soft spell. Tuesday's data from the Australian Bureau of Statistics showed sales jumped 4.5 percent in December to a seasonally adjusted 103,743, a marked step up from November's 0.2 percent gain and the highest since August 2012.

Consumer confidence

Consumer confidence has rose to the highest level for more than four years after last week's surprisingly strong building approvals and retail spending figures. The latest ANZ-Roy Morgan Consumer Confidence Index rose 1.2 per cent to 123.5 points in the week to January 14, the highest level for the index since October 2013. Pushing the index higher was positive sentiment around current economic conditions, but respondents' views toward the future financial and economic conditions were slightly weaker than the prior week.

US dollar

The dollar index traded at 90.48, having reached its weakest level since January 2015, of 90.279, in early trade. "We have been seeing a steady decline in the dollar, not so much because the United States is seeing weakness but because the European Central Bank could very well withdraw monetary accommodation later in the year," said Bart Melek, head of commodity strategy at TD Securities in Toronto. The euro rose on Monday after an ECB official said the central bank could end its bond purchase scheme after September.

Iron ore

Iron ore futures in China ticked up on Tuesday after dropping 2 percent in the previous session, but record stockpiles of the steelmaking ingredient at the country's ports kept a lid on price gains. Stockpiles of imported iron ore at China's major ports reached 152.83 million tonnes on Jan. 12, up 2 million tonnes from the previous week, data compiled by SteelHome consultancy showed. That was the biggest port inventory since 2004 when SteelHome began tracking the data. The stocks increased 30 percent last year. The most-active iron ore contract for May delivery on the Dalian Commodity Exchange was up 0.6 percent at 541 yuan ($84) a tonne.