TORONTO (Reuters) - Toronto's main stock index ended higher on Monday, propped up by a rise in the financial and energy sectors, but the market gave up much of its early gain after a report Germany and other European nations could be downgraded.
Nearly all of the TSX index's 1.6 percent gain evaporated after the Financial Times reported Standard & Poor's warned Germany, France and four other AAA-rated euro zone countries that they might get downgraded in the next 90 days.
That report chipped away at optimism that European leaders were on their way to designing a plan to resolve the euro zone's debt crisis. French President Nicolas Sarkozy and German Chancellor Angela Merkel agreed on a master plan for imposing budget discipline across the region, saying the EU treaty will need to be changed.
"Clearly what we saw today was market participants expecting that we were on the path to beginning to resolve some of the concerns about European debt," said Kate Warne, Canadian market strategist at Edward Jones in St. Louis, Missouri.
"Unfortunately, with the rumors -- and I would highlight rumors -- that S&P may downgrade the remaining triple A credits in Europe, I think investors have become more concerned ... (that the) impact of downgrade could overwhelm even a modest agreement reached on Friday."
The Toronto Stock Exchange's S&P/TSX composite index .GSPTSE closed up 44.24 points, or 0.37 percent, at 12,119.33. Six of the index's 10 sectors were higher.
Earlier on Monday, the index climbed 1.6 percent to 12,268.91, its highest level since November 16.
The TSX's gains add to the index's healthy 5.3 percent rise last week.
Financials, up 0.8 percent, led the market higher, with Toronto-Dominion (TD.TO) rising 0.9 percent to C$73.43, and Royal Bank (RY.TO), up 1 percent at C$49.27, on lingering euphoria after the banks issued stronger than expected earnings reports released last week.
"Most of the earnings we've seen thus far in the financials have been better than expected. I think people are hoping for a continuation of the good news," said Michael Sprung, president at Sprung Investment Management Inc.
Manulife (MFC.TO) added 3.8 percent at C$11.63.
The sector rose even as the price of oil floundered. <O/R>
"If the problems in Europe look like they're being exacerbated and they're talking about downgrading the mega economies in Europe then that would just feed into this whole idea of a global slowdown in the economy, which would have negative effect on commodities," said Sprung.
"Maybe it's because the companies themselves have been brining out some good news in terms of what their outlook is going forward for the next year or so," he added, explaining the discrepancy between shares and the commodity price itself.
Elsewhere, diversified miner Teck Resources TCKb.TO rose 3 percent to C$38.99.
The blue chip S&P/TSX 60 index .TSE60 closed 2.19 points higher, or 0.32 percent, at 688.63 on Monday.
Editing by Jeffrey Hodgson