By Alastair Sharp
TORONTO (Reuters) - Canada's main stock index capped a stellar week with further gains on Friday, extending a two-year peak as industrial and resource stocks gained on data showing the Chinese economy, the world's second-biggest, grew at its fastest pace this year.
Adding to the rosy view for stocks, investors are betting that the U.S. Federal Reserve will delay trimming its stimulus measures due to the economic damage inflicted by the partial U.S. government shutdown that ended on Thursday.
"A lot of Canadian money managers have been sitting on their hands watching what's been happening south of the border and, that having been sorted out, at least in the short term, they are back in the market," said David Cockfield, managing director and portfolio manager at Northland Wealth Management.
"I think this trade deal is encouraging people as well," he added, referring to the signing of a multibillion-dollar trade pact between Canada and the European Union.
The deal will make Canada the only Group of 8 country to have preferential access to the world's two largest markets, the EU and the United States, home to about 800 million people.
The Toronto Stock Exchange's S&P/TSX composite index <.GSPTSE> closed up 99.73 points, or 0.77 percent, at 13,136.09, its highest level since July 2011. It gained 1.9 percent on the week, its best weekly performance since July.
Air Canada rose 4.6 percent to $5.19. The airline, which reached a deal to expand its main hub in Toronto, has risen sharply in recent months amid a major expansion push and solid traffic growth.
Investors pushed aircraft maker Bombardier up 1.8 percent to C$5.08 after it said a Chinese company may double its total order of new jetliners.
"No question the worst is over in China. Things have stabilized and are now on the upswing and that is very important for worldwide growth," said Barry Schwartz, a portfolio manager at Baskin Financial Services.
Third-quarter growth in China, the world's second-biggest economy, was 7.8 percent from a year ago, its quickest pace for the year, thanks largely to investment.
All of Canada's ten main sectors advanced except materials, which was weighed down by retreating gold miners. Some of the biggest gains came from the heavyweight financial and energy sectors.
"If you are sitting on a bunch of cash, you probably slide back into the utilities, the big financials," Northland's Cockfield said.
The financial subgroup rose 0.7 percent, powered by Royal Bank of Canada . The bank rose 1.1 percent to C$69.53, pushing its market capitalization above C$100 billion, a first for a Canadian lender.
RBC, which along with other Canadian banks has been boosted lately by signs that Canada's housing sector is stabilizing, is currently Canada's largest publicly traded company.
Royal, Toronto-Dominion Bank , Bank of Nova Scotia and National Bank of Canada all hit record highs.
Baskin's Schwartz said Canada's banks and real estate investment trusts (REITs) have room to rally further.
"Interest rates are now back to where they were before the taper talk, yet the REITs aren't," he said.
Riocan Real Estate Investment Trust gained 1.6 percent to C$25.75 and Dundee Real Estate Investment Trust added 1.6 percent to C$29.52.
Schwartz said that after the distraction of the U.S. debt crisis, investors should be focused on interest rates, inflation and stock valuations, and that each factor was looking prime for improvement in Canada.
"Stocks are still the shiniest gold coin in a tarnished box of treasure," he said.
The heaviest fall belonged to Athabasca Oil Corp , which plunged 12 percent to C$6.13 after a court ruled that an aboriginal group could appeal the approval of an oil sands project.
(Additional reporting by Cameron French and Solarina Ho; Editing by Kenneth Barry)