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Markets

Market looks to US-China talks after rocky start to new year

Bonds and gold attract capital as investors dump volatile stocks

An electronic board in Tokyo shows the plunging Nikkei Stock Average on Friday, alongside Thursday's result for the Dow Jones Industrial Average.   © Reuters

TOKYO/WASHINGTON -- Global stock markets concluded a roller-coaster first week of the new year Friday, with the latest news triggering massive swings in either direction. Now all eyes turn to the U.S.-China trade talks, which begin Monday in Beijing, to guide the next steps.

Wall Street rebounded on Friday, with the Dow Jones Industrial Average closing 746 points, or 3.29%, higher at 23,433, after diving 660 points on Thursday. Investors were first buoyed by a better-than-expected jobs report for December. Stocks extended their rally later after Fed Chairman Jerome Powell said the central bank is "prepared to adjust policy quickly and flexibly" in response to economic conditions.

Japan's benchmark Nikkei Stock Average plummeted by more than 700 points during the first trading day of the year on Friday before ending 452 points down at 19,561, a 2% decline from the previous session Dec. 28.

Friday's performance earned a dubious distinction as the Nikkei average's third-worst opening day in history. After suffering its first annual loss in seven years during 2018, the benchmark now has shed 4,000 points since the beginning of last year.

Meanwhile in China, equities rallied Friday due to looser liquidity policies and hopes for progress on trade negotiations with Washington.

Regarding those trade talks, the U.S. trade representative announced Friday that the American delegation will be led by Deputy Trade Representative Jeffrey Gerrish and accompanied by undersecretary-level officials from the departments of agriculture, commerce, energy and treasury, as well as senior officials from the White House.

Investors on both sides of the Pacific are responding to the historically shaky start in equity markets this year by taking refuge in safer options such as gold and government bonds.

Global currency markets are now fully reflecting the defensive stance of investors. The yen, considered a haven asset, strengthened to the 104 per dollar range at one point Thursday. Meanwhile, currencies of resource-rich nations depreciated further because of their exposure to China's economic slowdown. The Australian dollar softened to its lowest against the U.S. dollar in roughly a decade.

The yen was not the only haven asset to attract global investors. Money-market funds, which manage short-dated debt, reached a net balance of $3.05 trillion as of Wednesday, a level not seen in about nine years.

Gold futures in New York received quotes of around $1,300 per troy ounce, a roughly six-month high.

Benchmark 10-year yields for U.S. Treasury and Japanese government bonds have been declining as demand has risen. On Friday, 10-year JGBs touched a low not seen in two years and two months.

In the U.S. bond market, the yield curve inversions are growing increasingly stark. Such inversions are taken as a sign that a recession is looming. The yields for five-year Treasurys are undershooting two-year yields, which strongly track hikes in U.S. policy rates. The closely watched spread between 10-year and two-year Treasury yields has contracted sharply since last month.

On Wednesday, the five-year Treasury yield hovered below the top range of the policy rates set by the Federal Reserve. The five-year yield "suggests the average rate the market forecasts for the next five years, and people have started to price in a rate cut," said Eiji Dohke at SBI Securities.

"Investors have expressed strong concerns that the global economy is heading toward a recession" instead of a slowdown, said Yoshinori Shigemi at J.P. Morgan Asset Management.

Apple downgraded its revenue forecast this week, putting China's flagging economy into sharp relief.

"The markets had not completely accounted for the weakness of China's real economy," said Kosei Mikuni of Nissay Asset Management, echoing a growing view.

Nikkei staff writers Yukako Ono and Kotaro Fukuoka in Tokyo contributed to this report.

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