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* TSX advances 0.6%
* Loonie strengthens 0.2% against the greenback
* Canadian 10-year yield edges nearly one basis point higher
By Fergal Smith
TORONTO, Sept 21 (Reuters) - Canada's main stock market rallied on Tuesday and the loonie edged higher against its U.S. counterpart, as the re-election of Prime Minister Justin Trudeau's Liberals reassured investors that the outlook for the economy would continue to improve.
The Toronto Stock Exchange's S&P/TSX composite index was up 116.97 points, or 0.6%, at 20,271.51, recovering from its lowest closing level in nearly two months the day before.
It was business as usual in Canada after Trudeau fell short of winning a majority in a tightly contested parliamentary election, leaving him once again dependent on opposition legislators to govern.
The status quo was welcomed by the market, said Sadiq Adatia, chief investment officer at BMO Asset Management.
Investors are "happy to see that the economy will continue to move forward and the reopening plans will continue to move in the direction that's already in place," Adatia said.
Gains for the TSX came as global financial markets stabilized following heavy selling on Monday. Investors were assessing the level of contagion stemming from the distress of developer China Evergrande and awaiting Wednesday's interest rate decision by the U.S. Federal Reserve.
The Canadian dollar, which has largely been on the back foot since June, was trading 0.2% higher at 1.2805 to the greenback, or 78.09 U.S. cents.
"Unlike most high-income countries, Canada is unlikely to embark on near-term fiscal consolidation," Marc Chandler, chief market strategist at Bannockburn Global Forex, said in a note.
"A policy mix of tighter monetary policy and relatively looser fiscal policy tends to be supportive of the currency."
The Liberals have pledged a substantial C$78 billion in new spending over five years, while analysts expect the Bank of Canada to further reduce its bond purchases as soon as next month.
The Canadian 10-year yield was up nearly one basis point at 1.231%. (Reporting by Fergal Smith Editing by Paul Simao and Aurora Ellis)