* U.S. jobs data, China policy action boosts stocks
* MSCI World Equity index hits 2-1/2 week high
* Sino-U.S. tariff talks to resume
* Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh (Adds U.S. stock futures, updates prices)
By Abhinav Ramnarayan
LONDON, Jan 7 (Reuters) - Strong employment data in the United States, decisive action from the Chinese central bank and dovish messages from U.S. Federal Reserve chief Jerome Powell steadied markets on Monday, pushing an index of world stocks to a 2-1/2 week high.
The resumption of talks between the United States and China on tariffs also helped restore some optimism to a market battered in recent weeks by trade tensions and a weakening global growth outlook.
Though European shares were in the red on Monday, they were still close to three-week highs after Friday's strong gains and a stellar opening for Asian bourses. MSCI's world equity index .MIWD00000PUS , which tracks shares in 47 countries, was still at its highest level in 2-1/2 weeks and about 6 percent higher than its December trough.
"It is a reminder that central banks still have some firepower to deal with lower growth prospects, and perhaps what we are also getting some return of liquidity as investors return from the holidays," said Investec economist Philip Shaw.
He warned, however, that there is continued uncertainty about global growth, trade talks between the United States and China and U.S. monetary policy.
"There are a number of questions that remain unanswered," Shaw said.
On Friday, U.S. non-farm payrolls data showed the world's largest economy added 312,000 net new jobs in December, while wages rose at a brisk annual pace of 3.2 percent, both way above expectations. along with a 100 basis point cut in China's bank reserve requirement ratios and comments from Fed Chair Jerome Powell that the U.S. central bank would be flexible in its approach in 2019, has been the main driver for the recovery. boost to stock markets saw them recapture all the year's losses and push into positive territory for 2019, with Wall St's main indices closing up more than 3 percent by the close on Friday.
After gains of more than 2 percent in Shanghai and HK on Friday before the U.S. jobs data and Powell's comments, both markets added almost 1 percent more on Monday. Japan's Nikkei reversed Friday's plunge to gain 2.4 percent.
European stocks were slightly lower across the board, though mining stocks .SXPP were up 0.7 percent after the reserve requirement ratio cut from China boosted metals prices, especially steel and iron ore. renewed optimism saw U.S. Treasury yields rise off recent lows, and two-year yields move back above the federal funds rate to 2.49 percent. US2YT=RR
That is nearly 50 bps below the November peak, however, suggesting there is still plenty of nervousness around growth prospects for the U.S. economy.
"Clearly markets are now pricing in the risk of a cut in 2019," said Shaw of Investec. "That's a big shift given until relatively recently when we've been focusing on rate hikes."
BUYING THE DIP?
Some of the stocks recovery may be attributed to investors buying stocks once again in the belief that the market had bottomed out or had overshot in pricing in global risks.
In any case, Friday was a strong session for Wall Street, with the Dow .DJI recording gains of 3.29 percent, while the S&P 500 .SPX jumped 3.43 percent and the Nasdaq .IXIC 4.26 percent.
Futures pricing were flat to slightly lower, suggested that Wall Street would hold on to most these gains. .N
Goldman Sachs (NYSE:GS) researchers expect a bounce in equity markets in 2019.
"If, as we expect, global economies slow down in 2019 but avoid recession, and U.S. interest rates peak, there is likely to be a risk rally," they said in a note.
Analysts at Bank of America Merrill Lynch (NYSE:BAC) said that with 2,055 of 2,767 U.S. and global companies in a bear market, it might be time to buy.
"Our Bull & Bear Indicator has fallen to an 'extreme bear' reading, triggering the first 'buy' signal for risk assets since June 2016," they wrote in a note.
The U.S. dollar -- which served as a safe haven in 2018 -- fell broadly, with the euro edging up to $1.1440 EUR= and the dollar index .DXY easing 0.25 percent to 95.94.
The currency could not even hold early gains on the yen, lapsing back to 108.36 JPY= .
Gold benefited from the diminished risk of U.S. rate hikes and rose half a percent to $1,290.90 XAU= , just off a six-month high.
Oil prices firmed after Brent bounced about 9.3 percent last week. The crude benchmark LCOc1 rose 135 cents on Monday to $58.42 a barrel, while U.S. crude futures CLc1 gained 111 cents to $49.07. O/R