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U.S. and Canadian stocks closed higher on Friday, marking the end of a tumultuous week, as U.S. Federal Reserve officials calmed investor fears over a potential liquidity crisis in the banking sector.

While the major North American stock indexes started the session sharply lower on the heels of a sell-off among European banks, those losses reversed by closing bell, repeating the intraday roller coaster ride of recent sessions. The bond market was also volatile in both Canada and the U.S., with a big dip in yields at the start of the day largely retraced by the end of the session.

At the conclusion of an active week, marked by a Fed interest rate hike and mounting worries over the health of the banking system, all three major U.S. stock indexes as well as Canada’s TSX notched weekly gains.

“Equity markets drifted higher as concerns lingered about another banking flare up in the U.S. or abroad,” said David Carter, managing director at JPMorgan Private Bank in New York. “Wall Street is taking its cues from Washington and other capitals as it relates to interest rates and banking regulations.”

In separate appearances, three regional Fed bank presidents said that their confidence that the banking system was not facing a liquidity crisis is what led to the decision to implement a 25 basis point policy rate hike on Wednesday.

But while Fed officials continue to see additional rate hikes as a strong possibility, financial markets are now favouring the likelihood of a no hike at all at the conclusion of its next policy meeting in May. And markets are pricing in rate cuts in both Canada and the U.S. by this summer.

“The Fed may be jaw-boning a bit as it says more rate increases may be coming this year,” JPMorgan’s Carter added. “It helps both their inflation goal and suggests confidence in our economic system.”

Some economists are also doubting rate cuts are coming as soon as this summer in Canada and the U.S. given the still elevated levels of inflation.

“Whether the central banks blink and then pivot all comes down to how the economy responds to the recent series of events,” BMO Capital Markets chief economist Douglas Porter said in a note Friday. “We suspect the resulting damage isn’t enough to drive rate cuts anytime soon.

Worries over potential contagion beyond regional banks threatening to spread to their larger peers was sparked by a sell-off of European bank shares.

That sell-off was prompted by the rising cost of insuring Deutsche Bank’s debt, expressed by its credit default swaps, coming on the heels of the state-sponsored buyout of Credit Suisse, has fed into the narrative of sector-wide stress.

But those worries eased by mid-afternoon.

While the S&P Bank index ended modestly lower, the KBW Regional Bank index jumped 2.9%.

The Dow Jones Industrial Average rose 132.28 points, or 0.41%, to 32,237.53, the S&P 500 gained 22.27 points, or 0.56%, to 3,970.99 and the Nasdaq Composite added 36.56 points, or 0.31%, to 11,823.96.

Nine of the 11 major sectors in the S&P 500, with defensive sectors such as utilities and real estate enjoying the biggest percentage gains. Consumer discretionary and financials were the two losers.

U.S.-traded shares of Deutsche Bank dropped 3.1%.

Shares of major U.S. banks, such as JPMorgan Chase & Co , Wells Fargo pared their losses but still ended lower, while Bank of America flipped green.

Regional lenders PacWest Bancorp, Western Alliance Bancorp jumped 3.2% and 5.8%, respectively, while First Republic Bank dropped 1.4%.

Elsewhere, Activision Blizzard jumped 5.9% after the UK competition regulator dropped some competition concerns in the Microsoft-Activision deal.

The Toronto Stock Exchange’s S&P/TSX composite index ended up 41.57 points, or 0.2%, at 19,501.49. It was up 0.6% for the week, after two straight weeks of declines.

The TSX energy sector was down 0.6% as oil settled 1% lower at $69.26 a barrel. In contrast, industrials and materials both rose 0.4%. The latter includes gold and base metals miners and fertilizer companies. Gold has benefited in recent days from safe-haven demand.

Reuters, Globe staff

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