Source: The Canadian Press

The Toronto stock market closed sharply higher Tuesday as another major acquisition in the Canadian financial sector raised hopes for a strong economic rebound and more such dealmaking.

The S&P/TSX composite index jumped 171.87 points to 13,365.15, while the TSX Venture Exchange was up 8.68 points at 2,155.83.

The financial sector ran ahead 1.6% after TD Bank (TSX:TD) said it is buying Chrysler Financial, the automaker’s old lending arm, from U.S. private equity firm Cerberus Capital for $6.3 billion.

The bank says the move will allow it to further invest in the North American auto lending market, which will help it grow its consumer loans portfolio. Its shares rose $2.64, or 3.74%, to $73.16 as the bank also said it will not issue additional stock to pay for the purchase.

Elsewhere in the sector, Bank of Montreal (TSX:BMO) improved by $1.18 to $57.78 while Royal Bank (TSX:RY) was up $1.04 at $51.82.

“It’s a confidence booster when you see very large deals,” said Kathryn Delgreco, investment adviser at TD Waterhouse.

“Merger and acquisition activity is a very prominent thing to see develop as you’re coming out of recession as those companies that are strong, their balance sheets are in good condition, they look for opportunities to deploy cash. And that’s exactly what we’ve seen happen with TD Bank, Bank of Montreal.”

Bank of Montreal said Friday it was buying U.S. lender Marshall & Ilsley Corp. for $4.1 billion in stock.

Research firm Dealogic reported Tuesday that corporate deals have totalled US$2.7 trillion so far this year, up 18% compared with all of 2009. Caterpillar Inc., Chevron Corp. and Google Inc. have also made significant deals in 2010.

The Canadian dollar lost ground as the greenback gained against other currencies after Portugal became the latest European country to be warned of a possible credit rating downgrade. The loonie was down 0.11 of a cent at 98.28 cents US.

The dollar also declined amid data showing that inflation remains very tame in Canada. Statistics Canada says inflation declined to an annualized 2% in November from 2.4% in October.

“This docile report will quell talk of a rate hike by the Bank of Canada in early 2011, especially in combination with the meagre 1% gross domestic product growth seen in the third quarter,” said Doug Porter, deputy chief economist at BMO Capital Markets.

Other economic data showed that higher gasoline prices drove overall retail sales up 0.8% to $36.6 billion in October. But with gas stations excluded, overall sales actually slipped 0.1%.

Investor sentiment also improved amid signs of easing tensions on the Korean peninsula. Investors have been watching North Korea’s apparent decision to avoid confrontation with South Korea despite accusing it of being “reckless” with its military drills.

The energy sector rose 2% as the February crude contact on the New York Mercantile Exchange was ahead 45 cents at US$89.82 a barrel. Suncor Energy (TSX:SU) gained 88 cents to C$37.52 while Cenovus Energy (TSX:CVE) ran ahead 85 cents to $32.78.

Shares in Ivanhoe Energy (TSX:IE) surged 29 cents, or 11.2%, to $2.88 after the company said it had made a “significant” natural gas discovery at its subsidiary Sunwing’s Yixon-2 well in southwest China.

Record high copper prices helped send the base metals sector up 1.32% as the March contract in New York added seven cents to US$4.28 a pound. Teck Resources (TSX:TCK.B) rose $1.17 to C$58.68 while Lundin Mining (TSX:LUN) climbed 16 cents to $7.24.

Gold stocks were flat even as the February gold contract on the Nymex rose $2.70 to US$1,388.80 an ounce.

Tech stocks were stronger after U.S. software maker Adobe Systems Inc. on Monday posted earnings for its latest quarter that exceeded analyst expectations. The company also provided a rosy outlook, saying it expects to get a lift from the continuing e-book revolution as publishers adopt its software tools. Adobe shares rose 6% to US$30.93.

Another technology company, Jabil Circuit Inc., said Monday that its fiscal first-quarter net income more than tripled on stronger revenue. Jabil, which makes parts for electronics and other technology companies, issued higher than expected guidance for the current quarter and its shares rose 10.7% to US$19.55.

On the TSX, Celestica Inc. (TSX:CLS) was up 32 cents at $9.95.

The U.S. dollar advanced after ratings agency Moody’s Investors Service warned Tuesday it might downgrade Portugal’s public debt. It cited uncertain economic growth amid Lisbon’s austerity drive, the high cost of borrowing on global markets and worries about the banking sector.

Moody’s said Portugal’s sovereign credit rating could be lowered a notch or two from A1.

The agency last week slashed Ireland’s rating by five notches and also warned Spain and Greece of possible downgrades.

“It’s just a realization of how fragile things are over there,” added Delgreco, who thinks that investors would be better off looking to areas outside of Europe to invest.

“They’re still going to continue to struggle and we definitely see the developed European countries as an area to not be participating in or having exposure to at this point in time. There are other places that offer less risk but still good opportunities for growth.”

Gains in financial stocks also helped send New York higher since “there’s a perception that some of the … bigger banks will start an acquisition program of their own in addition to what we’re seeing with some of the Canadian banks,” said Randy Bateman, chief investment officer for Huntington Asset Advisors.

New York’s Dow Jones industrial average gained 55.03 points to 11,533.16. The Nasdaq composite index climbed 18.05 points to 2,667.61 and the S&P 500 index added 7.52 points to 1,254.6.