The S&P/TSX composite index jumped 168.56 points to 12,005.42.
The Canadian dollar slipped 0.21 of a cent to 95.16 cents US amid rising U.S. bond yields.
U.S. indexes were also positive with the Dow industrials up 100.75 points at 14,760.31, the Nasdaq rising 27.13 points to 3,347.89 and the S&P 500 index climbing 14.94 points to 1,588.03.
Standard & Poor's/Case-Shiller 20-city home price index showed that U.S. home prices jumped 12.1 per cent in April from a year ago. The index also showed a 2.5 per cent increase in April from March, the biggest month-over-month gain on records dating to 2000.
Also, the U.S. Commerce Department said new home sales rose 2.1 per cent last month compared with April to a seasonally adjusted annual rate of 476,000, the highest level since July 2008.
Other data showed that orders for durable goods increased 3.6 per cent last month, matching April’s gain, but it was also much stronger than most economists had expected.
And Americans’ confidence in the economy rose to its highest level in more than five years, bolstered by a more optimistic outlook for hiring. The New York-based Conference Board says its U.S. consumer confidence index jumped to 81.4 in June from 74.3 in May.
Markets have sold off partly on worries that the U.S. Federal Reserve is prepared to put the brakes on its program of bond buying. Those US$85 billion of purchases every month have kept long-term rates low and helped many stock markets to rise sharply this year.
Analysts find the reaction to the move puzzling since a Fed exit from the program means economic conditions are improving.
"They said they may taper (bond purchases), and tapering is not a rate hike," said Kevin Headland, director, portfolio advisory group at Manulife Asset Management.
"It’s just easing a bit off the gas pedal and that’s not bad, it’s actually the transitionary handover from the Fed putting the gas in the engine to the consumer and the actual economy running on its own. And that’s not a bad thing at all."
Rising bond yields have also spooked markets. Yields spiked, up to 2.6 per cent Tuesday, which is almost a two-year high. The yield on the benchmark 10-year Treasury stood at 2.25 per cent last Wednesday before Fed chairman Ben Bernanke indicated that the Fed could start winding up the bond buying program later this year.
Markets were further rattled after China raised its interbank lending rate — the interest rate that banks must pay to borrow from each other — to over 13 per cent as part of an effort to trim off-balance-sheet lending.
Markets feared the move could hurt economic growth. China’s major state-owned banks are unwilling to lend to any but their biggest clients, so the vast majority of smaller businesses must rely on informal lending.
Traders were reassured on that front Tuesday after comments from the People’s Bank of China and other key government agencies. The central bank promised "liquidity support" if needed after a shortage of money in credit markets caused the interbank rate to spike last week. That move raised fears the world’s second-largest economy might face a credit crisis.
The bank appeared to soften Monday's tougher line, when it said markets had adequate liquidity and blamed the credit crunch on mismanagement by banks.
Traders also took in some major acquisition news in the health-care sector.
Two of Canada's largest medical lab operators will be combined under a $1.22-billion friendly takeover deal backed by one of Ontario's largest public sector pension funds. LifeLabs Medical Laboratory Services will pay $10.75 per share cash and assume $255 million of debt to acquire all of CML HealthCare Inc. of Mississauga, Ont. (TSX:CLC).
CML shares jumped $3.40 to $10.60.
Several major financial services companies, including Royal Bank of Canada (TSX:RY), are planning to set up a new Canadian stock market. The venture, to be called Aequitas Innovations Inc., would be an alternative to the Toronto Stock Exchange and other markets owned by TMX Group Inc. (TSX:X). TMX shares dropped $1 to $42.80.
The TSX base metals component rose almost 2.9 per cent as the July copper contract on the New York Mercantile Exchange was ahead five cents at US$3.07 a pound. First Quantum Minerals (TSX:FM) advanced 45 cents to C$14.74 while Teck Resources (TSX:TCK.B) improved by 72 cents to $21.94.
The information technology sector was ahead 2.7 per cent, with BlackBerry (TSX:BB) gaining 57 cents to $15.32 as the company launched a business service for corporate and government workers with Google Android and Apple smartphones. Called the Secure Work Space, it allows these users to separate their data and work apps, such as email and calendars, from their personal apps, bringing a greater level of security.
The industrials group rose 2.36 per cent while Canadian National Railways (TSX:CNR) advanced $2.16 to $100.74.
August crude on the Nymex edged up 14 cents to US$95.32 a barrel and the energy sector rose 0.5 per cent. Canadian Natural Resources (TSX:CNQ) was ahead 41 cents to C$29.76.
The gold sector was slightly higher as growing conviction the Fed will start to wind up its bond purchases pushed August bullion down $2 to US$1,275.10 an ounce. Barrick Gold (TSX:ABX) was down 37 cents to C$16.91.