New York City (AFP) - US equity markets appeared to be heading towards meltdown mode this week until the first signs of a breakthrough in the Washington budget battle changed sentiment.
Equity markets posted deep losses through midweek on the ongoing partial government shutdown and bleak commentary on the effects of a potential US debt default.
But the market's mood lifted suddenly and powerfully Thursday morning, when Republican House Speaker John Boehner signalled support for a temporary extension of US borrowing authority.
The Dow Thursday notched its second largest percentage gain of the year. The good cheer extended into Friday, enabling two of the three leading indices to post weekly gains.
The Dow Jones Industrial Average jumped 164.53 (1.09 percent) to finish Friday at 15,237.11. The broad-based S&P 500 tacked on 12.70 (0.75 percent) to 1,703.20, while the tech-rich Nasdaq Composite Index dropped 15.88 (0.42 percent) to 3,791.87.
There was still no deal by close of business Friday, but investors, figuring the global economy had dodged a bullet, were still in a giddy mood.
"It seems like all's good on Wall Street," said Anthony Conroy, a trader at BNY Convergex. "Everybody's pricing in that we'll have some sort of agreement."
"Yesterday was like the best day of the year and today is a good, strong follow-on," Greg Peterson, director of investment research at Ballentine Partners, said Friday.
The Washington budget debate loomed over the week, dominating other events, some of which were significant.
Early quarterly earnings reports came from aluminum producer Alcoa and banking giants Wells Fargo and JPMorgan Chase, which posted its first quarterly loss in nearly a decade after taking a $9.15 billion charge for legal expenses following a series of recent high-profile regulatory problems.
JPMorgan said its underlying performance remained strong despite the messy litigation, though mediocre lending levels in some key customer areas continued to suggest a tepid economic recovery.
JPMorgan chief executive Jamie Dimon predicted Washington would meet its deadline to raise the debt ceiling, suggesting the alternative outcome was unthinkable.
"The country cannot have a debt default," Dimon said.
President Obama made history in tapping Federal Reserve Vice Chair Janet Yellen to be the first woman to lead the US central bank.
Yellen, who is regarded as "dovish" on inflation, signaled she would not break with the US central bank's current easy-money policies aimed at pushing down unemployment, still high at 7.3 percent in August.
Until the Washington shutdown drama took hold, Wall Street's top preoccupation was determining when the Fed would scale back its $85 billion-a-month bond-buying program. Yellen's appointment likely shifts the timeframe for the taper until 2014, analysts said.
The International Monetary trimmed its 2013 economic growth forecast by 0.3 percent to 2.9 percent and its 2014 forecast by 0.2 percent to 3.6 percent.
The report came ahead of the annual Washington meetings of the IMF and the World Bank. Yet once again the proceedings were shadowed by concerns about the US fiscal situation, especially a potential debt default.
"It's an issue that concerns all of us," said Chilean Minister of Finance Felipe Larrain.
"It is a US problem but ultimately it can kill the recovery of this economy and have a strong impact on the rest of the world."
The shutdown has pushed back releases of key economic data in recent weeks, including the monthly jobs report and retail sales. More delays are expected in the coming week, though the Federal Reserve is scheduled to release its Beige Book of economic indicators.
Also, the Conference Board, which is not part of the government, is scheduled to release its report on leading economic indicators.
The busy earnings calendar includes reports from leading technology companies, including Google and Intel, and top banks, such as Citigroup and Dow component Goldman Sachs.
Still analysts expect the focus to remain on the Washington budget negotiations. While stocks ended the week smiling, there could be more bumps ahead. The current proposal pushes the time-frame to the end of November."There's still a lot of work to be done," said Peterson. "So I'm sure there's going to be more volatility."