At midday: Stocks see best rally in two months

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North American stocks enjoyed their biggest one-day gains in about two months on Monday in midday trading, as investors bet that the U.S. will avert the so-called fiscal cliff.

Shortly after noon, the Dow Jones industrial average was up 179 points or 1.4 per cent, to 12,763. The broader S&P 500 was up 23 points or 1.7 per cent, to 1383. In Canada, the S&P/TSX composite index was up 141 points or 1.2 per cent, to 12,018.

The rally follows far-more modest gains on Friday, when investors reacted to early indications that talks on the fiscal cliff – or automatic tax increases and spending cuts should a budget agreement not be found – were going well. Meeting participants described the talks as "constructive."

As well, the latest look at the U.S. housing market pointed to ongoing improvement. The National Association of Home Builders survey of builder confidence jumped to a five-year high of 46. Economists had been expecting a reading of 41.

Existing home sales rose 2.1 per cent in October, over September, and the inventory of unsold homes retreated to 5.4 months from 5.6 months in September – suggesting that the glut of homes is gradually decreasing.

The rally favoured economically sensitive stocks, which had been among the hardest hit during the recent market downturn. Within the S&P 500, materials and technology stocks rose 2.2 per cent each, while financials and energy stocks rose 1.9 per cent each.

Defensive stocks tended to lag: Health care stocks rose 1 per cent and utilities were unchanged.

Within Canada's benchmark index, materials rose 1.8 per cent, energy stocks rose 1.4 per cent and financials rose 0.8 per cent.

Europe also rallied: The U.K.'s FTSE 100 rose 2.4 per cent and Germany's DAX index rose 2.5 per cent.

Among commodities crude oil rose to $88.98 (U.S.) a barrel, up $2.06. Gold rose to $1,733 an ounce, up $18.