TSX gains as banks, insurers seen gaining from Fed

By Alastair Sharp

TORONTO (Reuters) - Canada's main stock index gained ground on Thursday with financial stocks leading the way as investors bet on higher U.S. interest rates and economic recovery helping insurers and domestic lenders.

Financial companies took four of the top five spots on the list of positive index movers, a day after the U.S. Federal Reserve raised the specter of an earlier-than-expected increase in interest rates in Canada's largest trade partner.

"If (U.S.) interest rates go up a little faster than anticipated that is generally good news for bank interest margins," said Elvis Picardo, strategist at Global Securities.

"For insurers especially, higher bond yields makes a big positive difference to their portfolios, and so does the recovery in equity markets," he added.

Insurer Manulife Financial Corp (Toronto:MFC.TO - News) jumped 2.6 percent to C$21.61 and peer Sun Life Financial Inc (Toronto:SLF.TO - News) added 1.7 percent to C$38.91.

Royal Bank of Canada (Toronto:RY.TO - News), the country's biggest lender, added 0.5 percent to C$72.19 and Toronto-Dominion Bank (Toronto:TD.TO - News) rose 0.4 percent to C$51.80.

On Tuesday, Bank of Canada Governor Stephen Poloz warned about a prolonged period of sluggish growth and low interest rates.

"If you look at a bank like TD, I believe it has more branches in the U.S. now than it has in Canada," Picardo said. "The Canadian banks have been making inroads into the U.S. in the last 5 years."

U.S. equities have hit record highs during an extended period of low interest rates and monetary stimulus that appears to be coming to an end, but talk about higher rates also signals that the Fed expects the U.S. economy to expand.

"You would anticipate, all other things being equal, that Canada is going to do OK and even maybe quite well because if they (the U.S.) are doing well they are going to need more of the stuff we make and produce," said Gavin Graham, chief strategy officer at Integris Pension Management Corp.

Canada's stock market is dominated by natural resource-related companies, which had a mixed day.

"Gold is taking a hit because it's felt there's less need for disaster insurance," Graham said.

Canadian Pacific Railway Ltd (Toronto:CP.TO - News) lost 1.7 percent to C$170.12 and Canadian National Railway Co (Toronto:CNR.TO - News) slipped 0.5 percent to C$62.84.

The Toronto Stock Exchange's S&P/TSX composite index (.GSPTSE) ended the session up 27.79 points, or 0.19 percent, at 14,361.83. Half of its 10 main sectors gained on the day, included the three biggest groups.

($1=$1.13 Canadian)

(Reporting by Alastair Sharp; Editing by Peter Galloway and Phil Berlowitz)