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Stocks soared on Friday, launching the blue chips back into positive territory for the year, as traders grew more confident that European policymakers would craft a solution for the region's debt crisis, and numerous corporate heavyweights posted strong quarterly results.
Consumer-driven shares posted the best performance after McDonald's (NYSE:MCD) posted quarterly earnings that topped expectations. The materials sector performed strongly as well on the back of a rally in metals futures. However, every major sector was sharply to the upside.
Volatility, as measured by the VIX, tumbled 7.4%, and the yield on U.S. government debt began climbing as investors rushed back into equities. The benchmark 10-year note yields 2.221% from 2.194%.
Wall Street has had a turbulent week, bouncing between big gains and losses. Headlines from Europe have been driving the markets, as traders have fretted that the debt and financial crises will spread from the periphery to the core, potentially causing a threat to major global economies.
Germany and France -- Europe's economic superpowers -- conceded late Thursday that a solution will not be finalized at this weekend's summit, but one would be announced no later than the following Wednesday. Developments Friday suggested the 17-member currency bloc may be nearing a compromise on how to structure the region's bailout fund, the European Financial Stability Facility. The Austrian finance minister said the group is down to two options on how to leverage the EFSF.
Previous media reports have suggested that one option the group is considering is allowing the EFSF to sell troubled sovereign debt it acquires straight to the European Central Bank. This, economists say, would dramatically enhance the EFSF's firepower because its capital won't get locked up in buying debt, and the ECB has theoretically limitless buying abilities. However, this has made Germany uneasy, so there has also been a proposal to allow the EFSF to leverage using commercial banks, which would be considerably more restrictive.
This comes as the international community, including the U.S., has turned up the heat on EU officials to stem the crisis before it does more damage to global economies. The markets have added pressure too, with the spread between European safe-haven bonds, the German bund, and other sovereign debt widening markedly this month, meaning investors are demanding higher yields to hold the relatively riskier sovereign debt. This makes it more expensive for countries to borrow, and creates a feedback loop that worsens the crisis.
European traders remained optimistic that officials will be able to draft a solution by next week. Indeed, euro-zone blue chips leaped nearly 3%, and the euro rose 0.67% to $1.39. The dollar fell 0.71% against a basket of world currencies.
A heavy earnings week comes to a close today. Nearly half of Dow components, and more than 20% of the S&P 500 will have reported by the end of the day.
Big Earnings Week Ends on High Note
McDonald's third-quarter net of $1.45 a share topped analysts' predictions by two cents. The fast-food giant benefited from a bigger-than-expected increase in same store sales.
General Electric (NYSE:GE), the biggest U.S. conglomerate, said its earnings jumped 18% to 31 cents a share in the third quarter, excluding one-time charges, meeting analysts' expectations. Verizon Communications (NYSE:VZ) posted continuing profits of 56 cents a share, topping estimates of 55 cents.
There were no major economic releases on Friday.
Energy markets were higher on a much weaker dollar. Light, sweet crude gained $1.33, or 1.6%, to $87.40 a barrel. Wholesale RBOB gasoline rose 1 cent, or 0.34%, to $2.68 a gallon.
Metals were sharply to the upside as well. Gold jumped $23.20, or 1.4%, to $1,636 a troy ounce. Silver soared 91 cents, or 3%, to $31.19 a troy ounce.
The Euro Stoxx 50 soared 2.9% to 2,337, the English FTSE 100 rose 1.9% to 5,488 and the German DAX surged 3.6% to 5,929.
In Asia, the Japanese Nikkei 225 slipped 0.04% to 8,678 and the Chinese Hang Seng rose 0.24% to 18,026.