Markets Surge in Canada After Defeat of Separatists : Securities: Toronto stock index gains 1.8%. But close vote raises concerns about nation’s long-term stability.

Canadian financial markets rallied strongly across the board Tuesday as the federal government and banks lowered key interest rates in the wake of voters’ narrow defeat of a referendum that would have allowed Quebec to leave Canada.

Investors, who in recent weeks had retreated to the sidelines, were relieved with the outcome and poured money back into Canadian investments, giving stocks their biggest single-day boost in eight years. Bond and currency markets also rallied.

“There is a big sigh of relief “ said Ruth Getter, chief economist for Toronto Dominion Bank. “If it had gone the other way there would have been a monumental disaster.”

Still, the slim margin--Quebec voters rejected the referendum 50.6% to 49.4%--raises longer-term concern about Canada’s political and economic stability, which could dampen investor enthusiasm. The vote also raises uncertainty about the government’s ability to continue reducing its big budget deficit.

“My view is, enjoy the rally now because it won’t be sustained,” said Patti Croft, senior economist for CIBC/Wood Gundy in Toronto.

The most euphoric reaction came on Bay Street in the heart of Toronto’s financial district. The Toronto Stock Exchange composite index of 300 stocks shot up nearly 3% at the opening bell before falling back to a gain of 1.8%. The index closed at 4,459.20, up 79.44 points. Individual, institutional and international buyers participated.

It was the third-biggest gain ever for the Toronto index, though it didn’t quite cancel out the 100-point loss recorded a week earlier. Financial stocks were among the strongest gainers.

“People have concluded in the short term it will be business as usual,” said Clement Gignac, chief economist at Levesque Beaubien in Montreal. “We’ve returned to where we were two months ago.”

The Canadian dollar also surged to 74.41 cents per U.S. dollar. The currency--known here as the “loonie” because it is imprinted with the likeness of a loon--recently had fallen as low as 72.5 cents and was expected to fall below the all-time record of 69 cents if the French-speaking separatists succeeded in winning Quebec’s independence.

Bonds also moved ahead sharply, spurred by reaffirmation of Canada’s and Quebec’s credit ratings and the interest rate cuts. The yield on the benchmark 30-year bond fell to 8.03% from 8.21%. Bond yields, often a barometer of economic uncertainty and political turmoil, had risen in the face of the Quebec vote.

The Bank of Canada, the nation’s central bank, on Tuesday trimmed the nation’s bank rate 1.47 percentage points to 6.18%. A week ago the bank had raised the benchmark rate nearly a full percentage point.

The sharp drop prompted the Bank of Montreal and other major banks to lower the prime rate from 8% to 7.75%. Most mortgage and consumer loans in Canada are tied to the prime rate.

The referendum, which was limited to Quebec voters, captivated this nation as late polls showed the decision was too close to call. Canadians camped in front of television sets Monday evening to watch the results.

At South Side Charley’s, a pub just north of downtown, patrons demanded that the telecast of the ABC Monday night football game be turned off so they could listen to the vote outcome. They cheered when commentators announced the measure’s defeat.

“This will allow our economy to continue growing,” said Pat Mahoney, a Toronto advertising executive.

The threat of Quebec’s separation had shaken Canada’s financial markets for weeks and driven down the value of its currency. The referendum sparked fear of business, capital and worker flight from Quebec.

There also was worry that Quebec’s secession could have serious ripple effects in the U.S. economy, possibly resulting in the loss of export-related jobs. Canada is the United States’ largest trading partner.

Quebec, Canada’s largest province geographically, accounts for about a quarter of the country’s economic activity. It is an avid exporter and has benefited from the North American Free Trade Agreement.

The Canadian economy is growing slowly, but the recovery is export- rather than consumer-driven. Prime Minister Jean Chretien has been trying to rev up the economy by lowering interest rates and paring the nation’s $400-billion federal deficit.

Despite the strong bounce in the markets Tuesday, there was an undercurrent of ongoing uncertainty created by the razor-thin margin, which could divert the government from its deficit-reduction goals.

“The problem has not been resolved at all,” Getter said. “The concern arises whether the federalists will be able to continue the deficit-reducing course if they have to compromise with Quebec.”

Sherry Cooper, chief economist at investment dealer Nesbitt Burns, said Ottawa needs to quickly deal with the issues raised by the Quebec referendum, possibly offering constitutional changes to satisfy the separatists.

“From an economic perspective, they must continue on the train of deficit reduction,” she said.

Already some foreign investors have expressed pessimism about the economic outlook for Canada. Morgan Stanley in New York said it will liquidate its Canadian investments because there is no clear resolution of the Quebec issue.

The brokerage house said it is concerned about the violence in Montreal and provocative statements made by Quebec Premier Jacques Parizeau, who resigned Tuesday after blaming the business and ethnic communities for the defeat.

Some business executives said the closeness of the vote and the persistence of the separatists may prompt them to reassess their operations in Quebec.

Alvin Segal, president of Peerless Clothing Inc., said his expansion-minded, export-dependent company is considering moving out of Quebec. “We’re going to think twice about continuing in the province,” he said.

* VOTE AFTERMATH

Separatist premier of Quebec, under fire, announces resignation. A1

* DOW RALLY FIZZLES

Blue-chip stocks close slightly lower after approaching record. D3