07/14/2013 08:00 EDT | Updated 09/13/2013 05:12 EDT

TSX could head higher this week as investors buy up beaten down resource stocks

TORONTO - The Toronto stock market could be in for more gains this week after the TSX landed back in positive territory for 2013 as traders picked up beaten-down resource stocks while the overall mood was lifted by optimism about stimulus intentions by the U.S. Federal Reserve.

Traders will be looking to the Bank of Canada as the central bank's new governor, Stephen Poloz, issues his first policy decision since taking over in early June. The bank's latest interest rate decision and the latest Monetary Policy Report will both be released Wednesday.

It's expected the BoC will leave its key rate unchanged at 1.25 per cent, but the markets will watching to see if the language in the accompanying statement will have signals of when the bank might raise rates.

"With inflation so low, there is a good case for dropping the Bank's tightening bias," said CIBC chief economist Avery Shenfeld in a commentary.

"But governor Poloz will be reluctant to do so at this very first opportunity, not wanting to look less concerned over his predecessor over the issue of high household debt."

The TSX ran up 327 points or 2.69 per cent last week after Fed chairman Ben Bernanke reassured markets that the U.S. needs a "highly accommodative monetary policy," or low interest rates, for the foreseeable future.

The Fed is buying $85 billion a month in bonds to keep interest rates low. Markets have been volatile after the U.S. central bank signalled it could start to taper those purchases later this year and finish with them by mid-2014.

Meanwhile, the resource sectors have also provided the Toronto market with some lift after holding it back this year.

The energy sector gained 3.84 per cent during the week, the base metals sector was ahead 3.71 per cent and the sector suffering the biggest declines, the gold sector, moved up about 3.4 per cent.

Demand concerns have sunk energy and base metals stocks while gold miners have been punished by bullion prices that have fallen to around US$1,200 an ounce as inflationary concerns fade and speculation mounted about what the Fed will do about its bond purchases. The sector had been down as much as 50 per cent year-to-date.

"But beyond that, the base metal producers have seen their shares really crushed," said Robert Gorman, chief portfolio strategist TD Waterhouse. The sector had been down well over 30 per cent for the year.

"Teck Resources (TSX:TCK.B) would be a good illustration of that. And I would say that the prices reflect extremely low expectations at this stage of the game."

Teck moved up almost eight per cent last week after hitting a fresh 52-week low of $21.11.

"There is some value in these (stocks) at this stage of the game and you probably have to be patient, stick with the higher quality names," said Gorman.

"But I think after the pummelling they have taken, people are stepping back, at least in a few cases and saying, gee, these are still pretty high quality companies, in Teck’s case for example, with strong balance sheets, still profitable with commodities at current levels and so on."

The energy sector has fared much better than the miners but has been pretty much flatlined up until last week.

The improved performance came as oil prices settled last week at 15-month highs of around US$105 a barrel.

Gorman pointed out that a big drop in inventory levels is helping supporting that price.

"You had a glut of oil in Cushing, Oklahoma, which is where the price for the Nymex contract is set," added Gorman.

"And so the excess inventory caused the price to be relatively low. So what we have been seeing is that those inventory levels in Cushing have been coming down. From early January they’re down 9.4 per cent."

At the same time, the price differential between West Texas Intermediate (WTI), the type of oil priced on the Nymex and Western Canadian Select (WCS), produced from the Alberta oilsands, has narrowed considerably since the start of the year.

"So if you think this through, the WTI price is up, which is good for Canadian producers," said Gorman.

"And the spread is back to normal levels so this will result in higher net numbers for a number of Canadian producers, especially of WCS. So names like Canadian Natural Resources (TSX:CNQ) and Baytex (TSX:BTE), which are very sensitive to this are just starting to move on this."