The S&P/TSX composite index edged up 27.08 points to 11,995.66, recovering a fraction of its losses after the U.S. central bank said it could wind down its bond-buying program by the middle of next year, which traders took to mean that higher interest rates are on the way.
Meanwhile, the Canadian dollar also added to recent losses, plunging 0.76 of a cent to 95.64 cents US — its lowest close since late November 2011 — amid a higher U.S. currency and data showing a disappointing read on retail sales and tame inflation.
U.S. indexes also closed mostly higher as buyers snapped up stocks also beaten down over the previous two days, with the Dow Jones industrials up 41.08 points to 14,799.4 and the S&P 500 index up 4.24 points at 1,592.43. The Nasdaq was down 7.39 points at 3,357.25.
Analysts indicated there was nothing to suggest these gains will carry into next week.
"Maybe we're flatlining this for awhile because there's nothing here to indicate that we're all of a sudden going to run away," said Fred Ketchen, manager of equity trading at Scotia Capital.
"One thing about it: interest rates aren't going down and it would be logical for me to say that interest rates are going up but I don't know when."
Investors have got used to central banks flooding the financial markets with stimulus since the 2008 financial collapse and subsequent recession.
The Fed's purchase of US$85 billion a month in bonds has kept long-term interest rates low and also helped fuel a strong rally on most stock markets. The exception has been the resource-weighted TSX, where mining stocks in particular have lost ground amid a sluggish global recovery.
Nonetheless, the Fed appears to think that economic data is nearly strong enough to allow it to let up on its bond buying program.
Markets have anticipated for weeks now that the Fed would cut back on its bond purchases, which had the effect of boosting the American dollar and bond yields.
The yield on the U.S. benchmark 10-year bond hovered around 2.5 per cent Friday afternoon, up from about 2.25 per cent before Bernanke made his announcement Wednesday afternoon. The yield had been as low as 1.6 per cent in early May.
The prospect that the policy will be unwound sooner than many investors thought prompted big moves late Wednesday and Thursday, with the Dow shedding well over 500 points. The blue chip fell 271 points or 1.8 per cent this week but is still up about 13 per cent year to date.
The TSX fell about 400 points in the previous two sessions, and ended the week down 192 points or 1.57 per cent. The main Canadian index is down 3.52 per cent so far this year.
TSX commodity stocks were mixed after sustaining a severe mauling. Prices fell heavily Thursday, partly because of demand concerns that arose from a weak Chinese manufacturing report but also because of the higher U.S. dollar.
A higher U.S. dollar pressures commodities because a stronger greenback makes it more expensive for holders of other currencies to buy oil and metals, which are dollar-denominated.
The gold sector was the biggest percentage gainer in Toronto, up about 2.5 per cent as August gold climbed $5.80 to US$1,292 an ounce on the New York Mercantile Exchange after tumbling $88 to a 2 1/2 year low. Goldcorp (TSX:G) improved by 79 cents to C$25.60 and Barrick Gold Corp. (TSX:ABX) gained 61 cents to $17.71.
Higher bond yields have also punished stocks in sectors such as utilities, pipelines, REITs and telcos and it was these sectors which provided some lift to the TSX on Friday.
The TSX telecom sector gained almost one per cent with BCE Inc. (TSX:BCE) ahead 45 cents to $43.60 and Rogers Communications (TSX:RCI.B) climbing $1.67 to $46.45.
The utilities component also improved almost one per cent and Atlantic Power (TSX:ATP) ran up 25 cents to $4.41.
The base metals component was up 0.67 per cent as July copper edged up three cents to US$3.10 a pound following an eight-cent drop Thursday. First Quantum Minerals (TSX:FM) was ahead 14 cents to C$15.62.
The energy sector was slightly lower with the August crude contract down $1.45 to US$93.69 a barrel after giving up almost $3 on Thursday. Canadian Natural Resources (TSX:CNQ) shed 24 cents to C$29.37.
Elsewhere, shares in Wi-LAN Inc. (TSX:WIN) (NASDAQ:WILN) jumped 46 cents or 10.82 per cent to $4.71 after it said Thursday after the close that it has renewed its licensing agreement with Samsung Electronics Co., Ltd. Under the agreement, Wi-LAN grants Samsung a licence to its patents for wireless products such as handsets, tablets and laptops, and for networking infrastructure equipment.
In economic news, Statistics Canada said that the annual inflation rate rose to 0.7 per cent in May while core inflation was stable at 1.1 per cent, both below expectations.
Canadian retail sales edged up 0.1 per cent to $39.5 billion in April, less than the 0.2 per cent that had been expected, following flat sales in March. Statistics Canada said that stronger sales at motor vehicle and parts dealers were offset by weaker sales at gasoline stations.