12/29/2011 08:19 EST | Updated 02/28/2012 05:12 EST

Debt crisis worries to weigh on TSX despite positive Italian bond auction

TORONTO - The Toronto stock market shook off an early decline to close higher Thursday afternoon as investors looked past a tepid response to a key Italian bond auction and took in some positive U.S. economic data.

The S&P/TSX composite index moved up 113.29 points to 11,841.7 while the TSX Venture Exchange added 10.47 points to 1,461.55.

The Canadian dollar gained ground as the greenback lost some of its early strength, rising 0.32 of a cent to 97.96 cents US.

U.S. markets also advanced as data showed that a measure of jobless insurance applications over the past month fell to a 3 1/2-year low, an indication that hiring could pick up.

Other data showed contracts to buy homes rose to the highest level in a year and a half.

The Dow Jones industrials gained 135.63 points to 12,287.04. The Nasdaq composite index was ahead 23.76 points to 2,613.74 while the S&P 500 index rose 13.38 points to 1,263.02.

Earlier, the Bank of Italy reported that the government raised a total of €7 billion at the auction. Most importantly, it raised €2.5 billion of 10-year bonds at an average yield of 6.98 per cent.

That’s still relatively high but lower than the 7.56 per cent it had to pay at an equivalent auction last month when investor concerns over the ability of the country to service its massive debts became particularly acute.

However, the amount borrowed fell short of the top of a target range of €8.5 billion. And Italy's borrowing rate on the key 10-year bond remains uncomfortably close to the seven per cent level widely considered to be unsustainable in the long run.

Unlike Greece, Ireland and Portugal — all of which had to request financial bailouts after their 10-year bond yields pushed above seven per cent — Italy is reckoned too big to bail out.

Investors initially sold off the euro after the auction, pushing the regional currency as low as US$1.28, the lowest level since September 2010 as traders get more and more impatient at the absence of a comprehensive solution to the debt crisis.

"There is no solution on the table that the market can accept right now," said John Stephenson, portfolio manager at First Asset Funds Inc.

"It’s been one band-aid solution after another," Stephenson said. "As long as (the markets) continue to see this patched over, until you have either a Lehman-esque event where people realize that something dramatic has to occur or the ship is going to sink today, I think we go on with this slow drip, drip, drip."

The euro later traded at US$1.2961, up from $1.2938 in late North American trading Wednesday.

The European debt crisis has set the tone on stock markets for much of the year over fears that it will end up derailing a fragile global recovery.

Many eurozone countries have had to adopt tough austerity measures, choking off growth and raising fears that parts of the region are already in recession.

Markets have also been volatile on fears that a country like Italy could default, which would send huge shock waves through the financial sector.

Worries about a return to recessionary times have sent the key index of the resource heavy TSX down about 12 per cent this year, pushed further into the red by a 198-point plunge on Wednesday.

A recession which would further lower demand for oil, copper, coal, wood and many of the resources Canada produces.

That would weaken exports and squeeze profits in corporate Canada, eroding a main driver of share prices on the stock market.

Oil prices turned positive as traders balanced a report showing a smaller than expected jump last week in U.S. crude supplies with concerns about Iran’s threat to block a key Middle East oil shipping route.

The February contract on the New York Mercantile Exchange climbed 29 cents to US$99.65 a barrel after the Energy Information Administration said U.S. oil supplies rose by 3.9 million barrels last week. Analysts had expected supplies to shrink. The rise is a sign demand could be weakening.

But the gain was much less than the amount announced Wednesday by the American Petroleum Institute, which had said that crude inventories rose 9.6 million barrels last week.

The TSX energy sector moved up 1.09 per cent with Suncor Energy (TSX:SU) ahead 56 cents to C$29.12 and Imperial Oil (TSX:IMO) rising 71 cents to $44.99.

The base metals sector climbed 1.95 per cent with March copper unchanged at US$3.37 a pound. First Quantum Minerals (TSX:FM) gained 63 cents to C$19.34 while Ivanhoe Mines (TSX:IVN) advanced 45 cents to $18.17.

The gold sector gained about two per cent even as February gold on the Nymex closed down for a sixth session, losing $23.20 to US$1,540.90 an ounce. Barrick Gold Corp. (TSX:ABX) rose 81 cents to C$46.07 and Goldcorp Inc. (TSX:G) improved by 86 cents to $44.42.

Gabriel Resources Ltd. (TSX:GBU) says it’s working with the Romanian government in hopes of softening the impact of a recently announced doubling of royalties on precious metal production. Romania’s royalties on precious metal production will rise to eight per cent from four per cent. Toronto-headquartered Gabriel says it’s awaiting a formal clarification on if, or how, the change would affect its flagship Rosia Montana gold and silver project and its shares added 25 cents to $5.99.

Financials were also supportive with Royal Bank (TSX:RY) ahead 62 cents to $51.47 and Manulife Financial (TSX:MFC) gained 23 cents to $10.68.

In other corporate news, Mosaic Co. (NYSE:MOS) shares were off a penny to US$50.28 Thursday in the first trading since the Minnesota-based fertilizer company announced it would reduce production of finished phosphate by up to 250,000 tonnes in the first quarter of 2012. On the TSX, Potash Corp. of Saskatchewan (TSX:POT) climbed 20 cents to C$42.10.