TSX off early highs, still up nine per cent on government bank rescue plans

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(The Canadian Press)

By Malcolm Morrison, The Canadian Press

TORONTO - The Toronto stock market surged about 10 per cent in late-morning trading as investors digested a massive rescue package aimed at U.S. banks.

Remarkable as the stock market's performance was, Toronto's gains were about half what they had been earlier in the morning when the S&P/TSX composite index bounded ahead by over 1,600 points.

Close to midday the main index was up 804.7 points or 8.9 per cent to 9,869.86 after U.S. president George Bush announced the government would spend US$250 billion to directly buy shares in America's leading banks.

That followed signals that European governments were putting up nearly $2 trillion to safeguard their banks.

"What we've seen is panic and contagion have been threatening the world economy and investors were creating their own reality, really," said Paul Vaillancourt, director of asset allocation at Franklin Templeton Managed Solutions in Calgary.

"The fear of the possibility of a painful recession, not just a normal one, was leading to a serious crisis of confidence on the part of investors and consumers and even some economists and strategists."

Toronto market gains were led by beaten-down financials, and energy stocks also ran ahead as oil prices firmed up following a 17 per cent slide last week.

The November crude contract on the New York Mercantile Exchange was off 55 cents to US$80.64 a barrel after topping $84 earlier in the session following a $3.46 rise Monday. That was a reversal from last week when crude fell more than 17 per cent.

Higher crude prices and a weaker American currency sent the Canadian dollar up 2.36 cents to 87.05 cents US, after a drop of 2.6 cents Friday.

New York stock markets were mixed following huge gains Monday.

The Dow Jones industrial average was up by more than 300 points in early action, but investors skimmed some profits after Monday's 11 per cent charge - its biggest one-day percentage gain since 1933 - and the blue-chip index faltered 22.22 points to 9,365.39.

In addition to the $250-billion equity injection into U.S. banks, Bush said the Federal Deposit Insurance Corp. will "temporarily guarantee" most new debt issued by insured banks. And the Federal Reserve will "soon finalize work" on becoming the buyer of last resort for commercial paper.

Finance Minister Jim Flaherty said Monday that Ottawa will act to prevent unintended consequences from policy measures by other countries that would put Canada's banks at a competitive disadvantage.

The Bank of Canada said Tuesday the U.S. and European moves will benefit the Canadian financial system, and it continues to expand liquidity provisions to financial institutions in Canada.

The TSX Venture Exchange gained 97.64 points to 1,073.45.

New York's Nasdaq composite index was down 40.07 points to 1,804.18. The S&P 500 index dipped 3.60 points to 999.75 after gaining 11.6 per cent Monday, its biggest one-day gain in 69 years.

The rebound on global markets came following a massive selloff last week amid paralysis on credit markets. The TSX index plunged 16 per cent on the week and the Dow lost 18.2 per cent, dragged down by worries about falling commodity prices and a spreading recession.

Analysts warn of ongoing volatility as investors grapple with the problems facing the financial system and the global economy.

"This begins to penetrate the core of the problem," said Peter Cardillo, chief market economist at New York-based brokerage Avalon Partners.

However, he added, "there will be a point in time where the euphoria of the bailout plan begins to wear off and the market begins to face reality. And that reality is likely to be a sour earnings season, and that the economy is in recession."

Asian markets shot higher Tuesday.

Japan's Nikkei index, which like the TSX had been closed for a holiday on Monday, jumped 14.2 per cent, gaining 1,171.14 points to 9,447.57 - its largest increase ever.

Hong Kong's Hang Seng index rose 3.2 per cent, after advancing more than 10 per cent Monday.

European stocks were stronger, but well off earlier highs.

London's FTSE 100 gained 57.01 points or 1.3 per cent to 4,313.91, while Germany's DAX and the French CAC-40 each rose 1.4 per cent.

On the TSX, the financial sector rose 10.4 per cent with Royal Bank (TSX: RY.TO) ahead $4.52 to $45.22 and Bank of Montreal (TSX: BMO.TO) up $4.17 to $41.57.

Manulife Financial Corp. (TSX: MFC.TO) gained $3.23 to $29.86 after Canada's largest insurance company said it expects to take a $250-million hit on its third-quarter earnings because of credit losses linked to the worldwide financial crisis.

The energy sector jumped almost 12 per cent with EnCana Corp. (TSX: CA.TO) ahead $6.22 to $49.72 and Suncor Energy (TSX: SU.TO) advancing $2.74 or 15 per cent to $28.83.

The industrial and base metal sectors were also ahead mode than 10 per cent.

Other big stocks powering Toronto higher included Potash Corp. (TSX: POT.TO), higher by $14.33 to $116.83; Research In Motion Ltd. (TSX: RIM.TO), up $6.71 to $70.71.

Teck Cominco Ltd. (TSX: TCK-B.TO) improved $2.51 to $18.87 and Bombardier Inc. (TSX: BBD-B.TO) climbed 72 cents or 21 per cent to $4.22.