However, there was some disappointment with a much weaker than expected report on U.S. home sales.
The S&P/TSX composite index gained 87.95 points to 12,762.3 on top of a 101-point gain Thursday after HSBC Corp.'s preliminary purchasing managers index showed an expansion in China’s manufacturing in August. Traders took that as evidence that the world’s second-largest economy may be over its recent weakness.
"Because the markets are hypersensitive to not only the levels of anything coming out of China but direction, that HSBC flash manufacturing number really caught everyone’s attention," said Robert Gorman, chief portfolio strategist at TD Waterhouse.
"And it really helped sentiment, you could see that following through."
The Canadian dollar erased early losses to edge up 0.14 of a cent to 95.23 cents US while the greenback weakened after the U.S. Commerce Department said sales of new homes dropped 13.4 per cent in July to a seasonally adjusted annual rate of 394,000. That’s down from a sales pace of 455,000 in June, which was revised sharply lower from a previously reported 497,000.
"The data may have markets reassessing U.S. growth and when (or by how much) the Fed will taper QE," said CIBC World Markets economist Andrew Grantham.
Elsewhere on the economic calendar, Statistics Canada said the July consumer price index came in at an annualized rate of 1.3 per cent, up from 1.2 per cent in June. Economists had looked for Canada's inflation rate to rise by two-tenths of a point to 1.4 per cent.
The loonie has been under severe pressure, tumbling 1.5 US cents this past week as the American dollar rose against other currencies amid growing conviction that the U.S. Federal Reserve will move this year to cut back on its monetary stimulus.
The Fed has been buying US$85 billion of bonds every month in a measure known as quantitative easing to keep rates low and encourage investment. There is still a great deal of uncertainty about when the Fed might embark on tapering its asset purchases and about the pace of such a cutback.
U.S. indexes advanced despite the housing data, with the Dow Jones industrials 46.62 points higher at 15,010.36.
The Nasdaq climbed 19.09 points to 3,657.79, supported by a 7.3 per cent rise in Microsoft shares after the software giant announced that CEO Steve Ballmer is retiring in the next 12 months. The S&P 500 index was up 6.51 points at 1,663.47.
The gold sector led TSX advancers, up about 2.6 per cent as December bullion moved up $25 to US$1,395.80 an ounce. Iamgold (TSX:IMG) improved by 39 cents to C$7.06 while Barrick Gold Corp. (TSX:ABX) climbed 54 cents to C$21.11.
The base metals component rose 0.82 per cent as September copper rose two cents to US$3.35 a pound. Lundin Mining (TSX:LUN) gained 14 cents to C$4.77 and Teck Resources (TSX:TCK.B) climbed 26 cents to $27.59.
The energy sector gained 0.67 per cent with the October crude contract on the New York Mercantile Exchange erasing early losses to close up $1.39 at US$106.42 a barrel. Suncor Energy (TSX:SU) rose 68 cents to C$36.06.
Financials were also positive ahead of earnings reports next week from most of the big Canadian banks. TD Bank (TSX:TD) was ahead 84 cents to $88.81.
Speculation about what the Fed may do about its asset purchases has driven bond yields higher. On Friday, the benchmark 10-year U.S. Treasury was down 0.07 of a point from late Thursday afternoon at 2.83 per cent.
But bond yields are still up a good 120 basis points since Fed chairman Ben Bernanke first mentioned the possibility of the Fed tapering its bond purchases in May.
Those rising bond yields have particularly impacted interest sensitive stocks including utilities and telecoms. The utilities sector is down about two per cent this week alone and eight per cent this month. Telecoms have also retreated, down about 0.5 per cent this week although the sector has also been pressured recently by the prospect of American telco giant Verizon entering the Canadian wireless market.
U.S. markets have also softened this month following a strong run-up that saw the Dow up as much as 20 per cent year to date at the beginning of August.
The TSX edged up 25 points this week while the Dow industrials fell 71 points.
In other corporate news, Maple Leaf Foods Inc. (TSX:MFI) is selling its Rothsay business unit to Darling International Inc. of Irving, Texas. The Rothsay business operates six rendering plants and a biodiesel plant employing a total of 550 in four provinces. Maple Leaf says it will receive about $645 million for Rothsay and use the money to pay down corporate debt and its shares gained $1.05 or 7.84 per cent to $14.44.