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U.S. and Canadian stocks rallied on Thursday as data showing a contraction in the U.S. economy for the second straight quarter raised investor speculation the Federal Reserve may not need to be as aggressive with interest rate hikes as some had feared. Bond prices also rose sharply - taking yields lower in a continuation of a six-week trend that could have ramifications for the housing market.

Canadian stocks gained even with a big drop in the health-care index following a negative patent court ruling impacting Bausch Health. Shares in Bausch - formerly Valeant Pharmaceuticals, which was briefly one of Canada’s most valued company based on market cap - were halted after tumbling by more than 50%.

Delaware federal district court judge Richard Andrews made a preliminary ruling that parts of patents related to a drug from its BHC subsidiary Salix Pharmaceuticals, called Xifaxan, are not valid. The judge also found generic drugmaker Norwich Pharmaceuticals infringed some Xifaxan patents. He has given Salix and Norwich until Aug. 3 to work out on a joint proposed judgment.

Brokerage J.P. Morgan said that the judgment holds as is, “it would represent a near-worst-case scenario for BHC” and may enable generic competition for Xifaxan around late 2024-2025. The U.S. bank downgraded BHC to “neutral” from “overweight.”

U.S.-listed shares of Bausch in the post market were up 12% as the company released a statement saying it plans to fight the ruling if it becomes final.

The U.S. Commerce Department said the American economy unexpectedly contracted in the second quarter at a 0.9% annualized rate.

The news increased the possibility that the economy was on the cusp of a recession, and some investors said it might deter the Fed from continuing to aggressively increase rates as it battles high inflation.

Benchmark U.S. 10-year treasury yields were at 2.671% by late afternoon, down about 6 basis points, while Canada’s note of the same tenure was down 13 basis points to 2.629%.

The decline in yields may suggest “that markets think the Fed will have to pivot and move rates lower at some point, maybe in the next 12 month period,” said Mona Mahajan, senior investment strategist at Edward Jones.

“It does imply the pace of tightening will become more gradual going forward.”

Canada’s five-year government bond - which heavily influences the setting of fixed mortgage rates - was down 14 points to 2.631%, a three-month low. In less than a week, the five-year bond has shed 50 basis points, and nearly a full percentage point from its mid-June peak when it reached 14-year highs.

While that could be perceived as bullish for the housing market, Douglas Porter, chief economist with the Bank of Montreal, notes that yields are declining only after a major run-up.

“Make no mistake, the back-up in yields in the past year is still enormous; they are still up a towering 185 basis points from a year ago,” Mr. Porter said in a research note. “Prior to this year, we had not seen five-year yields at the current level above 2.6% in over a decade, and they are north of the peak in the 2018 tightening cycle. And this is a huge hurdle for the housing market.”

Utilities and real estate - both of which tend to rise when U.S. debt yields fall - were the day’s best-performing S&P 500 sectors.

Also supporting the market: the growth forecast for second-quarter earnings has risen this week as more S&P 500 companies reported results and beat analyst expectations. Among them, Ford Motor Co shares jumped 6.1% after reporting a better-than-expected quarterly net income.

After the closing bell, shares shot up more than 12% as the online retailer reported quarterly sales that beat Wall Street estimates.

Apple Inc also reported profit and sales that beat Wall Street expectations, navigating parts shortages better than predicted and benefiting from unceasing demand for iPhones even as inflation has consumers tightening other spending. Shares rose 3.2% after hours following the release of the results.

S&P 500 futures were up about 2% in the post market following the results, suggesting markets could extend their rally into Friday.

In regular trading, the Dow Jones Industrial Average rose 332.04 points, or 1.03%, to 32,529.63; the S&P 500 gained 48.82 points, or 1.21%, to 4,072.43; and the Nasdaq Composite added 130.17 points, or 1.08%, to 12,162.59.

The Nasdaq registered its biggest two-day percentage gain since May 27.

Stocks had rallied in the previous session when the Fed raised rates and comments by Fed Chairman Jerome Powell eased some worries about the pace of rate hikes.

“More investors are getting in now because they think at least there’s not going to be any big surprises over the balance of the summer,” as far as rates are concerned, said Alan Lancz, president of Alan B. Lancz & Associates Inc, an investment advisory firm based in Toledo, Ohio.

Canada’s main stock index rose to its highest level in more than six weeks. The S&P/TSX composite index ended up 202.15 points, or 1.1%, at 19,456.71, its highest closing level since June 15. The TSX is down 8.3% since the start of the year.

“No question overall you are going to have slower growth but you got to maintain positivity in the fact that the numbers from some of these companies, the earnings, are not recessionary numbers and the guidance is not recessionary guidance,” said Barry Schwartz, a portfolio manager at Baskin Financial Services.

“People maybe are now positioning their portfolios for a rebound instead of more pain.”

The TSX energy sector advanced 2.2%, helped by a 13.8% jump in the shares of Ballard Power Systems Inc, tracking gains for U.S. clean energy stocks after Democratic Senator Joe Manchin, a key swing vote, supported a proposal for new climate change spending.

The materials group, which includes precious and base metals miners and fertilizer companies, added 1.6%, as gold and copper prices rallied.

Agnico Eagle Mines Ltd rose 6.4% after reporting better-than-expected quarterly earnings, while cannabis producer Tilray Brands Inc was up 13.8% on a jump in revenue.

Among declining stocks in the U.S., Facebook and Instagram parent Meta Platforms Inc fell 5.2% after it posted its first-ever quarterly drop in revenue.

Volume on U.S. exchanges was 11.21 billion shares, compared with the 10.86 billion-share average for the full session over the last 20 trading days. Advancing issues outnumbered declining ones on the NYSE by a 3.56-to-1 ratio; on Nasdaq, a 1.66-to-1 ratio favored advancers. The S&P 500 posted three new 52-week highs and 31 new lows; the Nasdaq Composite recorded 67 new highs and 97 new lows.

With files from Reuters

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