The TSX advanced 181 points or 1.2 per cent last week, lifted by data showing better than expected growth in Germany and the eurozone economy as a whole in the fourth quarter.
Advances were also supported by a rise of about 2.5 per cent in the energy sector amid a feeling that oil prices have found support around US$50 barrel. Prices have fallen more than 50 per cent since last summer as markets work through a huge supply/demand imbalance.
"It certainly has that feel that we‘re forming a base here," said Doug Porter, chief economist at BMO Capital Markets.
"But our view for the last month or so has been pretty consistent. We think oil is going to be more on the defensive through the first half of the year before it really stabilizes in the second half."
At the start of the week, traders will want to see how a ceasefire agreement brokered last week is holding.
Ukraine and pro-Russian forces were to pull heavy weaponry back from the front line, creating a zone 50 to 140 kilometres wide, depending on the calibre of the weapons. The withdrawals were to begin Monday and be completed in two weeks.
Investors are anxious to see an end to the almost year-long conflict for a variety of reasons, including the fact that it has held back Europe's economic recovery.
"You could make the case that the conflict in Ukraine and the sanctions (against Russia) played an important role in chilling the European economy last summer," observed Porter.
"There's no question that Germany has stumbled and a lot of it was because a big export market for them has sunk into a pretty serious recession."
Markets were also optimistic that Greece and its European creditors are open to compromise aimed at reaching an agreement to save the country from bankruptcy. There had been worries about demands by Athens to rewrite its bailout terms but markets have been reassured by the fact that leaders continue to talk.
How long an agreement might take is unclear, though Greece will need some sort of deal by Feb. 28, after which its bailout program ends.
Traders seem much more sanguine about Greece than in 2012 when the country last faced the prospect of default and Porter noted that conditions have improved greatly in three years.
"Fundamentally, what has changed is that there are more safeguards in place to protect against contagion if something untoward happened in Greece," he said. "And in some ways that actually weakens Greece's hand a little bit in negotiations because the other markets actually are remaining relatively well behaved."
It is a light week for economic data with traders looking to Canadian retail trade data for December at the end of the week. In the U.S., investors will digest data on housing starts and the most recent leading indicator — a look at how the economy should perform six months from now.
There will be plenty of earnings news for investors to digest, including reports from home improvement retailer RONA (TSX:RON), Lundin Mining (TSX:LUN), Barrick Gold (TSX:ABX) and pipeline company Enbridge (TSX:ENB).
It's a shortened trading week next week as the TSX is closed Monday because of Ontario's Family Day while New York is shuttered for President's Day.