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Stocks rally, close sharply higher as Deutsche rebounds 14%

U.S. equities close sharply higher on Friday as Deutsche Bank shares rebounded amid a report that the German banking giant was near a settlement with the Justice Department.

The bank's U.S.-listed shares rose 14 percent, recovering all of their losses from Thursday and posted their best day since 2011. AFP, citing a source, reported that the bank may be near a $5.4 billion settlement with the U.S. Department of Justice. CNBC has not independently confirmed the report, but if accurate, that settlement would be well below the reported $14 billion opening bid by the DOJ in its talks with Deutsche.

"The fact that investors are buying Deutsche Bank stock is a big vote of confidence from investors," said Adam Sarhan, CEO at Sarhan Capital.

The Dow Jones industrial average jumped 226.17 points at session highs before closing about 165 points higher, with Goldman Sachs contributing the most gains. The S&P 500 gained 0.8 percent, with financials rising more than 1 percent to lead advancers. The SPDR S&P Bank ETF (KBE) rose nearly 1.5 percent.

"Yesterday's pullback did not damage the chart of the SPX, which still has the support of improved short-term momentum. European markets look like they may be undergoing a shakeout (of weak holders) characterized by strong emotions and heavy volume," said Katie Stockton, chief technical strategist at BTIG.

The S&P also closed the month slightly lower. "You have a market that's restricted to the upside because of high valuations ... and to the downside you're protected by record-low interest rates," said Bruce Bittles, chief investment strategist at Baird. "The market has stayed in the same place."

The Nasdaq composite rose 0.8 percent, as Apple gained approximately 0.7 percent and the iShares Nasdaq Biotechnology ETF (IBB) advanced 1.2 percent.

"The issues with Deutsche are the first five things everyone is talking about," said Art Hogan, chief market strategist at Wunderlich Securities. "It's very easy after just 8 years to get that muscle memory from Lehman in 2008. I think that was reflexive."

Deutsche's U.S.-listed shares hit an all-time low on Thursday after Bloomberg reported that approximately 10 hedge funds were reducing their exposure to the bank.The bank's German-listed shares hit an all-time low overnight.

CEO John Cryan sent the bank's employees an internal letter earlier on Friday, trying to reassure them that Deutsche had strong fundamentals and that recent media reports were causing "unjustified concerns."

Sarhan also said the market was receiving a boost from comments made by Federal Reserve Chair Janet Yellen Thursday after the close. In a video conference, she said the U.S. central bank might be able to help the U.S. economy in a future downturn if it could buy stocks and corporate bonds.

"This has been largely overlooked by most, but to me it sticks out like a sore thumb," Sarhan said. "If this doesn't scream 'buy,' I don't know what does."

U.S. stocks closed about 1 percent lower on Thursday, with the Dow falling nearly 200 points.

"Yesterday's pullback also had a bit to do with the OPEC deal," said Randy Frederick, vice president of trading and derivatives at Charles Schwab. "They've been notorious for cheating on previous deals."

NYSE traders on the floor
Andrew Renneisen | Getty Images
NYSE traders on the floor

OPEC agreed to a production cut on Wednesday that would be enacted in November, but stock market participants remained skeptical on Thursday about the agreement. U.S. crude prices rose 0.86 percent to settle at $48.24 per barrel on Friday, a day after rising 1.66 percent. Baker Hughes also said rig counts rose by 7 to 425.

Friday also marked the end of the third quarter. The S&P and Dow rose 3.31 percent and 2.11 percent for the quarter, respectively, and posted a four-quarter winning streak. But the Nasdaq outperformed in the third quarter, gaining 9.69 percent and snapping a two-quarter slide.

"What's interesting about this quarter is we've moved but not a whole lot, from the S&P's perspective," said Schwab's Frederick.

In economic news, personal spending remained flat in August, while income rose 0.2 percent. The core PCE, the Federal Reserve's preferred inflation measure, rose 0.2 percent.

"Wage growth is still mediocre, spending is as well as healthcare takes up a larger portion of a households budget (along with rent for those that do). As for inflation, expect headline prints to continue to rise in coming quarters with the stabilization in oil prices on top of sticky services inflation," said Peter Boockvar, chief market analyst at The Lindsey Group.

Other data released Friday included the final read on September consumer sentiment and the September Chicago PMI, both of which beat expectations.

U.S. Treasurys fell, with the two-year note yield near 0.76 percent and the benchmark 10-year yield at 1.60 percent. The U.S. dollar fell against a basket of currencies, with the euro near $1.124 and the yen around 101.4.

Symbol
Name
Price
 
Change
%Change
DJIA
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S&P 500
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NASDAQ
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The Dow Jones industrial average rose 164.70 points, or 0.91 percent, to close at 18,308.15, with Wal-Mart leading advancers and Verizon the only decliner.

The S&P 500 gained 17.14 points, or 0.80 percent to end at 2,168.27, with financials leading eight sectors higher and utilities leading laggards.

The Nasdaq advanced 42.85 points, or 0.81 percent to close at 5,312.

About three stocks advanced for every decliner at the New York Stock Exchange, with an exchange volume of 1.157 billion and a composite volume of 4.026 billion at the close.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13.3, down about 5.2 percent.

High-frequency trading accounted for 52 percent of September's daily trading volume of about 7.04 billion shares, according to TABB Group. During the peak levels of high-frequency trading in 2009, about 61 percent of 9.8 billion of average daily shares traded were executed by high-frequency traders.

—CNBC's Spriha Srivastava and Reuters contributed to this report.