Stock markets trim earlier gains

S&P later confirmed it had put Germany, France and 13 other countries that use the euro currency on “creditwatch negative,” which means there is a 50-50 chance that one might be downgraded within 90 days

The S&P/TSX composite index’s gain on Monday was trimmed to 44.24 points to 12,119.33, down from the highs of the day. The TSX Venture Exchange closed down 3.53 points to 1,553.35.

The Canadian dollar gained 0.15 of a cent to 98.35 cents US. The loonie had earlier moved as high as 98.79 cents US a day before the Bank of Canada makes it next announcement on interest rates. The central bank is widely expected to leave its key rate unchanged at one per cent.

U.S. indexes were positive but also well off session highs with the Dow industrials ahead 78.41 points to 12,097.83.

The Nasdaq composite index gained 28.83 points to 2,655.76 and the S&P 500 index climbed 12.8 points to 1,257.08.

Stocks had rallied strongly during the morning, adding to strong gains from last week, after German Chancellor Angela Merkel and French president Nicholas Sarkozy met to discuss proposals ahead of Friday’s summit of all 27 European Union leaders.

The two leaders are calling for a new European Union treaty to ensure that the region’s debt crisis never happens again.

Sarkozy said Monday after a meeting with Merkel that they would prefer a treaty agreed by all members of the European Union but would also accept a treaty among just the 17 countries that use the euro.

The new treaty should include automatic sanctions for countries that violate rules meant to keep government deficits in check.

Economists say that tighter integration on budget matters could lead to further emergency aid from the European Central Bank, possibly through the International Monetary Fund.

“There’s a lot of things happening that could make this work out OK, like the ECB saying if we see constructive actions, we can be there as a bit of a backstop,” said John Johnston, chief strategist at Davis Rea Ltd.

“The thing is, to some degree the IMF needs money and U.S. Republicans will have to sign off on that at some point in terms of the U.S. contribution and that’s problematic.”

At the same time, Sarkozy said a jointly issued bond by all the countries that use the euro is not the solution to the continent’s debt crisis. Many analysts have said that only by issuing bonds backed by the whole eurozone will Europe be able to save its shared currency.

The Merkel-Sarkozy plan will define the agenda for a meeting in Brussels on Friday by the EU leaders. At stake is the survival of the euro, whose break-up would push Europe and the global financial system into chaos.

Optimism that leaders can deal with the crisis pushed stock markets sharply higher last week with the TSX surging 5.34% while the Dow industrials ran ahead seven per cent.

But Johnston pointed out that a comprehensive solution will be difficult to come up with.

“You have a number of countries in Europe, two of them are quite systemically important, Italy and Spain, who are hopelessly uncompetitive and they have too much debt,” he said.

“And any plan that doesn’t address those two things in the medium term, one year or so, probably raises the risk of a complete breakdown at some point.”

Commodities were mixed Monday as the January crude contract on the New York Mercantile Exchange was earlier well above US$102 a barrel but ended the session up three cents to US$100.99 a barrel.

The TSX energy sector ran up 0.81% as Suncor Energy (TSX:SU) advanced 40 cents to $31.16 and Cenovus Energy (TSX:CVE) climbed 41 cents to $33.50.

The base metals sector gained 2.63% while March copper prices were up three cents to US$3.62 on the Nymex. Prices ran up almost 10% last week after China, the biggest consumer of the metal, announced moves to ease lending and encourage growth. Teck Resources (TSX:TCK.B) rose $1.12 to $38.99 and Quadra FNX Mining (TSX:QUX) was up 65 cents to $11.35.

The financials sector was up 0.8% while Royal Bank (TSX:RY) climbed 50 cents to $49.27 and TD Bank (TSX:TD) gained 68 cents to $73.43.

Industrial stocks also supported the Toronto market as Canadian Pacific Railway (TSX:PCP) gained $1.54 to $63.85 and Canadian National Railways (TSX:CNR) was up $1.06 to $79.86.

However, rising losses in the gold sector also put pressure on the main Toronto index. The gold sector was down about one per cent while bullion prices fell back with the February contract in New York down $16.80 to US$1,734.50 an ounce. Barrick Gold Corp. (TSX:ABX) fell 73 cents to $51.15.

Goldcorp Inc. (TSX:G) has boosted its monthly dividend by 32% to 4.5 cents thanks to its strong cash flow. Its shares dipped 49 cents to $51.84.

There was another disappointment for traders Monday as a survey of the non-manufacturing sector in the U.S. came in worse than expected. The Institute for Supply Management’s service sector index came in at 52, down from 52.9 in October and down from the 53.5 reading that analysts had expected.

In corporate news, Frontier Rare Earths Ltd. (TSX:FRO) stock soared 20 cents or 19.05% to $1.25 after it reached an agreement with Korean government-owned Korea Resources Corp. to accelerate development of its Zandkopsdrift rare earth project in South Africa. Korea Resources also announced that it plans to form a consortium comprised of Korean companies to join the Frontier joint venture.