December 10, 2007 / 2:07 PM / 11 years ago

Stocks rally on gold, Fed rate-cut hopes

TORONTO (Reuters) - The Toronto Stock Exchange’s benchmark index finished higher on Monday as a jump in the price of gold and the expectation of a U.S. interest rate cut pushed investors to the market.

The S&P/TSX composite index rose 77.39 points, or 0.56 percent, to close at 13,940.36.

The energy group rose 0.54 percent, while financials added 0.76 percent ahead of an expected cut to U.S. interest rates by the Federal Reserve on Tuesday.

The resources-laden materials sector, buoyed by a 1.7-percent rise in the price of gold, jumped 1.06 percent.

Overall, six of the 10 main subgroups finished the day higher.

Many observers expect the Fed to deliver a rate cut of 25 basis points on Tuesday, with some even calling for double that. Lower interest rates mean a drop in borrowing costs for investors and companies alike and could help firm a U.S. economy shaken by a liquidity crunch tied to the subprime mortgage market.

However, equity markets could see a selloff if rates are left unchanged, given that so many investors are anticipating a reduction.

“If there’s any possibility that they didn’t cut rates, then watch out below — this entire thing could go into a nosedive in a matter of seconds,” said Gavin Graham, chief investment officer at the Guardian Group of Funds.

He added, however, it is unlikely that Fed Chairman Ben Bernanke would take “risks of that nature.”

Financial shares held up well on Monday, including Canadian Imperial Bank of Commerce (CM.TO), which rose C$1.29, or 1.6 percent, to C$80.84. Royal Bank gained 81 Canadian cents, or 1.6 percent, to C$53.07.

Montreal Exchange Inc MXX.TO rose C$2.98, or 8 percent, to C$40.18 after TSX Group (X.TO), which operates the Toronto Stock Exchange and the small-cap Venture market, said it will buy the derivatives-heavy Montreal market for C$1.3 billion.

“The financial services are all having a rebound from sort of the thrashing that they took,” said John Kinsey, portfolio manager at Caldwell Securities Ltd.

Financials on both sides of the border have suffered amid a credit freeze brought by the sharp downturn in the U.S. housing market. Those problems aren’t expected to vanish any time soon, and continue to drag on bank shares.

“It seems twice a week the credit situation pops its ugly head up (and banks) seem to have a bad day,” Kinsey said.

Meanwhile, the price of U.S. gold jumped almost 2 percent, taking with it Toronto-listed gold miners. Barrick Gold (ABX.TO) jumped C$1.02, or 2.6 percent, to C$40.93.

In the United States, the Dow Jones industrial average rallied 101.45 points to close at 13,727.03. The tech-heavy Nasdaq market rose 12.79 points to end at 2,718.95.

($1=$1.01 Canadian)

Reporting by Wojtek Dabrowski; Editing by Peter Galloway

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