Fed optimism, Tim Hortons lift TSX to 1-week high

Coffee chain Tim Hortons Inc also boosted Canada's main stock index rising 4 percent on news that it now faces pressure from US hedge fund Scout Capital Management to make changes after recently outlining plans to address the concerns of activist investor Highfields Capital.

Sentiment improved further after US consumer prices rose in May and a gauge of underlying price pressures indicated signs of stabilizing after a long decline.

However, speculation continued on whether the Fed will shed light at the end of its two-day meeting on Wednesday on when it might begin scaling back its bond buying program.

While global markets were roiled in recent weeks by talk of a possible stimulus rollback, investors have over the past two days been betting that the Fed will not turn off the monetary tap anytime soon.

"It's like a doctor saying to the patient, 'you don't need as much medicine anymore' and the patient saying, 'No, no, I want more medicine'," said Stan Wong, vice president and portfolio manager at Macquarie Private Wealth.

"Based on current data, I don't see the Fed stepping in and reducing stimulus in a major way until at least the first quarter of next year."

"The Fed is always late to the game," he added. "They're late coming in and adding stimulus and they are late leaving as well."

The Toronto Stock Exchange's S&P/TSX composite index closed up 78.56 points, or 0.64 percent, at 12,367.46, after earlier touching 12,389.07, its highest level since June 10.

"The US economy is still creating jobs, and the housing market appears to be getting better, but is it completely planted on its feet?" said Gareth Watson, vice president, investment management and research, at Richardson GMP. "I don't think the Fed is convinced of that yet."

Nine of the 10 main sectors on the index were higher.

Energy shares climbed more than 1.2 percent, benefiting from the US data that pushed up oil prices. In the group, Suncor Energy Inc added 1.6 percent to C$31.75 and played an influential role in leading the index higher.

Financials, the index's most heavily weighted sector, gained 0.7 percent. Royal Bank of Canada, the country's top lender, rose 1.2 percent to C$61.15 and played the biggest role of any single stock in leading the market higher.

The jump in Tim Hortons, to C$56.05, helped the consumer discretionary group climb 1.6 percent.

"This is just a natural process where people are expecting that perhaps with this investor stepping in, changes (at Tim Hortons) could be afoot," Watson said. "There's no guarantee, it's no slam dunk at all that that happens, but certainly speculation picks up."

Shares of gold producers tumbled 2.9 percent after a decline in the price of bullion.

"The catalyst for gold to go up has largely dissolved," Macquarie's Wong said. He noted that gold has lost its luster as a safe haven asset with gradually improving global economic conditions.

Barrick Gold Corp gave back 2.6 percent to C$19.24, and Goldcorp Inc slipped 2 percent to C$27.71.

In a Reuters poll released on Tuesday, analysts predicted the resource-heavy Toronto stock index, which has struggled to gain traction in 2013, would kick into gear in the second half of the year as the global economy rebounds.