The Toronto Stock Exchange hit its highest level in more than two years on Friday on signs the U.S. is in no hurry to remove stimulus, and China's pledge to open up its economy.
The S&P/TSX composite index closed up 51.18 at 13,482.56. That modest gain was about the same as the one seen in New York, where the Dow Jones was up 85 points to 15,961, the Nasdaq was up 13.2 points to 3,985 while the S&P 500 index gained 7.6 points to 1,798.
The reason for the cautious optimism was news out of Washington that the person likely to be the next head of the Federal Reserve signalled she's prepared to continue the central bank's low interest-rate policies to keep the U.S. economic recovery on track.
Cheap borrowing remains
During a confirmation hearing before the Senate banking committee, Janet Yellen warned critics that any potential risks posed by those policies are outweighed by the risk of leaving a still-weak economy to survive without them.
Her statements convinced markets that the central bank won't reduce its $85 billion US of monthly bond purchases until at least March.
Oil was higher, up 21 cents to $93.37 a barrel in New York. That was enough to light a fire under the energy sector. Suncor shares gained almost a per cent to $37.47. Canadian Natural Resources was up two per cent to $33.79 and Husky gained half a dollar to $30.63 per share.
Stock markets were also higher on word out of China that Beijing wants to reform its economy by making it easier for private companies to compete with state-owned enterprises there.
"It looks like they are going to do some reforms which should help out growth over time," said Sadiq Adatia, chief investment officer at Sun Life Financial.
"But I don't think it was as immediate and because of that, markets didn't take off [on the news]. So it isn't negative, it isn't overly optimistic, just slightly positive."
The Canadian dollar rose 0.04 of a cent to 95.57 cents US.
Concern over asset bubble
With the New York market up 24 per cent this year, there are concerns the Fed’s quantitative easing program is causing a stock market bubble.
Andrew Huszar, a former Fed official, said the stimulus program is helping Wall Street more than it is Main Street. He said he was involved in the plan to buy $85 billion US of bonds every month until 2010 and came to the conclusion that the plan did not make credit any more accessible for the average American.
"I think this was a well-intentioned program to begin with. There was a real value in QE 1 in that it did help stabilize the banking sector but I think we’ve seen there not the knock-on benefits to the average American citizen," he said in an interview with CBC's Lang & O'Leary Exchange.
However, banks made fat commissions on the program, as well as benefiting from the lower cost of making loans, he said. The banking sector has grown enormously since the 1980s and bankers are very influential within the Fed, he said.
"Between January of 2009 and the end of March of 2010, we bought $1.25 trillion in mortgage bonds and in that time there was a net decrease in mortgage lending in the U.S.," Huszar said.
"The banks in that time were doing what many of us did, they piled a lot of extra cash into their investment portfolios and generated earnings."
BMO Nesbitt Burns senior economist Sal Guatieri of BMO Nesbitt Burns is also concerned about the very low interest rates.
“While low interest rates justify higher stock values, the gain of the past year can’t be explained by improved fundamentals, as the economy has grown less than two per cent year over year and profits have risen a pedestrian four per cent,” he said of the U.S. market in an investment note.
He said there are other warning signs of a bubble, such as rapid runup of Twitter stock on the day of its IPO.