For the fourth day in a row, US traders arrive at their desks with US equity futures rangebound if with a modestly heavy bias, down around 4 points as of this moment, pressured by some recent weakness in European stocks, where DB continues to post modest gains following yesterday's report that Germany is pursuing "discrete talks" over the fate of the German lender. Oil has regained earlier losses following comments by Algeria's oil minister who said that OPEC could cut 1% more than agreed upon while sterling continues to slide on growing concerns of a "hard Brexit."

As has been so often the case, the Fed is back in the financial-market spotlight, with strengthening speculation that an interest rate hike is imminent pushing the dollar for an eighth day against the yen, dragging gold lower, and spurring the yield on two-year Treasuries to the most in 10 years versus German notes. Ahead of tomorrow's nonfarm payrolls report, where consensus expects a 172,000 print (up from 151,000), the market-implied probability of a Fed hike by December rose to 62% from 51% at the start of last week, after yesterday's record surge in the non-manufacturing ISM number. The dollar climbed against most of its peers following further evidence that the world’s biggest economy is sufficiently robust to cope with higher borrowing costs. Adding to the upward pressure in both the dollar and rate hike odds, Fed Vice-Chairman Stanley Fischer said on Wednesday that ultra-low rates are not necessarily here to stay,

After Tuesday's mini taper tantrum following a Bloomberg report that the ECB is considering tapering QE before its end, Bunds saw a sharp selloff however this morning the three-day losing streak ended before the European Central Bank releases the minutes of its last policy meeting, which is expected to unveil that Tapering is not among the expressed concerns. Banks in the region rose for a third day driven higher by steeper European yield curves, with the Stoxx Europe 600 Index fluctuating, while emerging-market equities climbed toward a two-week high. Gold extended its longest losing streak since May, and crude fell from its highest level since June.

As Bloomberg notes, positive economic reports this week have hinted that “tomorrow’s payrolls data has some scope to surprise to the upside” said Manuel Oliveri, a currency strategist at Credit Agricole SA in London. “If you have indications that the labor market continues to improve, it’s something that may actually put the Fed closer to tighten monetary policy in December. That’s the main reason why the dollar is very much in demand for now.”

The Stoxx 600 fell 0.3 percent in London, after Wednesday halting its longest streak without losses in a year on concern that the ECB is turning less accommodative. Banks posted the best performance of the equity benchmark’s 19 industry groups.Among the notable movers was EasyJet Plc which slid 6% after posting its first decline in annual profit since 2009 as terror attacks clipped demand and the weaker pound inflated foreign-currency costs. Dialog Semiconductor Plc (DLGNF) added 4.2 percent after the Apple Inc. (AAPL) supplier reported higher preliminary sales than forecast.

As Bloomberg summarizes, M&A activity was also in focus Thursday, spurring moves in the following stocks:

• UniCredit SpA rose 1.2 percent after a report that Amundi SA is ready to offer a more-than-expected 4 billion euros ($4.5 billion) for its Pioneer Global Asset Management SpA unit.
• Osram Licht AG surged 11 percent after a report that a Chinese company is planning to bid for the German maker of light bulbs and LEDs by mid-October.
• Sompo Holdings Inc. jumped by the most since February in Tokyo after the insurer said it agreed to buy New York-listed Endurance Specialty Holdings Ltd. for about $6.3 billion.
• Fujitsu Ltd. climbed 5.7 percent after the company was reported to be in talks to sell a majority stake in its personal-computer business to Lenovo Group Ltd., which advanced 1.5 percent in Hong Kong.
• Twitter Inc. (TWTR) tumbled 11 percent in premarket New York trading following a report that Alphabet Inc.’s Google isn’t interested in buying the social-networking service.

S&P 500 Index futures slipped 0.2% after U.S. equities gained 0.4% in the last session. The MSCI Asia Pacific Index added 0.3 percent with a measure of energy stocks surging 1.9 percent, for the best performance among 10 industry groups. The MSCI Emerging Markets Index rose 0.2 percent, heading for the highest close since Sept. 23. Shares in Hong Kong led gains, with the Hang Seng China Enterprises Index climbing 1.4 percent. The gauge has rallied 3.8 percent this week, while mainland markets remained shut for holidays.

Crude oil was unchanged after Algerian Energy Minister Noureddine Boutarfa said in an interview on Ennahar television that OPEC may cut 1% more output than agreed, adding that OPEC’s initial target is to raise prices to $50-$55 in 2017, adding that it is easier now for OPEC to discuss deeper cut as group is united, “speaking in one voice” after Algiers meeting. The rebound followed some earlier weakness after advancing 2.3 percent to a three-month high on Wednesday. U.S. stockpiles fell below 500 million barrels last week for the first time since January, official data show. The oil rally will stall at $55 a barrel, according to Goldman Sachs Group Inc.“ There is a bit of a cap for oil at about $50 because above that level, once we head up toward $55 a barrel, there’s concerns that U.S. shale producers will jump back into action,” said Michael McCarthy, chief market strategist in Sydney at CMC Markets.

In rates, the yield premium of 2Y Treasuries over German debt widened to the most since July 2006, indicating traders see U.S. rates rising sooner and faster than in Europe.While reports this week speculating on a paring of ECB stimulus weighed on the region’s bonds, the spread signaled that the policy-divergence view regarding the Fed and the ECB is still intact. U.S. 10-year Treasuries were little changed, with the yield near a two-week high. A Bloomberg index of developed-market sovereign debt ended Wednesday at the lowest level since July.

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Market Snapshot

• S&P 500 futures down 0.2% to 2152
• Stoxx 600 down 0.3% to 343
• FTSE 100 down 0.3% to 7010
• DAX down less than 0.1% to 10579
• German 10Yr yield down 4bps to -0.04%
• Italian 10Yr yield down 3bps to 1.33%
• Spanish 10Yr yield down 3bps to 1.01%
• S&P GSCI Index down 0.2% to 371
• MSCI Asia Pacific up 0.4% to 141
• Nikkei 225 up 0.5% to 16899
• Hang Seng up 0.7% to 23953
• Shanghai Composite #N/A N/A
• S&P/ASX 200 up 0.6% to 5483
• US 10-yr yield down less than 1bp to 1.7%
• Dollar Index up 0.16% to 96.28
• WTI Crude futures down 0.1% to $49.77
• Brent Futuresunchanged at 51.86
• Gold spot down 0.2% to $1,264
• Silver spot down 0.2% to $17.70

Top Global News

• Hurricane Matthew Is $15b Threat Headed to Florida: Storm pounding parts of central Bahamas with max. sustained winds at 115mph; expected to intensify as it approaches Florida: National Hurricane Center at 2am EST.; U.S. Flight Cancelations >1,000 as Hurricane Matthew Nears
• Twitter Shares Drop on Report Saying Google Won’t Bid: Shares down as much as 11% in extended trading.
• Salesforce (CRM) Drops on Concern About Potential Twitter Bid: CEO Mark Benioff appeared on CNBC last night.
• Wal-Mart (WMT) Boosts Stake in JD.com Moving Further Into China: WMT raises stake to 10.8% vs 5.9% previously.
• Goldman (GS) Employees Said to Pull $300 Million From Omega: Retirement plan is pulling funds; bank informed employees of decision in memo.
• MetLife Files for Spinoff of U.S. Unit After Weighing IPO: At least 80.1% stake in unit Brighthouse Financial will be distributed to MetLife investors under plan.
• Samsung Faces Blow as New Phone Blamed for Jet Evacuation: Replacement device blamed for smoke that led to evacuation of a Southwest plane.; Samsung Brings in Siri’s Creators With AI Acquisition
• Chesapeake Energy (CHK) Piles Up Cash to Cover Debts Through 2018: Co. closed $1.25b private placement of unsecured convertible notes yesterday.
• Muddy Waters’ Block Says He’s Short Builder Tutor Perini: Co. bleeds cash on working capital, has disproportionate level of client disputes in from claims, unapproved change orders, Block said.
• SunEdison (SUNE) Said to Map Restructuring Plan With TerraForm Stake: Co. taking steps to work out reorganization without liquidating prize asset, its controlling stake in TerraForm.
• McDonald’s (MCD) Said in Talks to Sell SE Asia Rights to Reza: Co. discussing selling franchise rights for Malaysia, Singapore to to group including Saudi’s Reza.
• Disney (DIS) CEO Sees Mobile Video Future, With or Without TWTR: Bob Iger declined to say whether he was interested in buying Twitter or Netflix.
• Philip Morris’s (PM) Cigarette Alternative Could Hit U.S. in 2017: iQos could be released as soon as FDA approves it for sale, CEO Andre Calantzopoulos said in interview.
• NSA Contractor’s Arrest Renews Focus on Risk Posed by Insiders: Booz Allen employee told investigators he took home documents, digital files containing highly classified data, storing much of it in his car, home.

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Looking at regional markets, Asian stocks took the impetus from a positive Wall St. lead where the energy sector was lifted as WTI crude prices rose towards the USD 50.00/bbl level following the unexpected drawdown in DOE crude oil inventories. This resulted in outperformance of oil names in ASX 200 (+0.5%), while Nikkei 225 (+0.5%) was buoyed by a weaker JPY after USD/JPY surged above 103.00. KOSPI (+0.6%) was led higher as index heavyweight Samsung Electronics rose to record high after the company said it would review proposals by Elliott Management for capital return, restructuring and a US listing, while Hang Seng (+0.5%) conformed to the upbeat sentiment across global equity markets in what was a relatively uneventful trading session with China remaining shut for Golden Week. 10 year JGBs were flat alongside the quiet trade seen across the region, with a better than prior 10yr inflation-indexed auction counterbalanced by a lack of demand due to gains in riskier assets.

Top Asian News

• Billionaire Activist Singer Appeals for Modernizing Samsung: His Elliott Management wants electronics unit to split in two.
• Hong Kong’s SFC Plans Specialist Probe Teams, Speedier Inquiries: Proposals envisage manipulation, fraud and misconduct teams.
• Barclays Private Bankers Said to Defect Before OCBC Acquisition: >10 wealth managers leave for Standard Chartered.
• Japan Seeking Up to $4 Billion From Kyushu Rail Share Offering: Japan sets IPO price range of 2,400-2,600 yen per share.
• Japanese Investors’ Yield Search Points to U.S. Municipals: Foreigners contributing to cash inflows to $3.8t muni market.

In Europe, attention is once again focused on Deutsche Bank, source reports indicate that the German Government have contacted the DoJ, in order to assist their beleaguered bank. The indications that there has been some collusion at the highest echelons of power and this appears to have alleviated some doubts surrounding Deutsche for now, which is currently trading higher by just under 1%, back above EUR 12/shr. Consequently, Financials outperform rival sectors in Europe, helped further by the increase in expectations of a December hike by the Fed. The majors reside in modest positive territory (Eurostoxx 50 +0.2%) with the exception of the FTSE 100 (-0.2%), which has been weighed upon by airline names after easyJet (-5.8%) released a poor interim report, which highlighted GBP 90mln losses through FX — a consequence of Brexit. Elsewhere, fixed income markets have seen a bit of a pullback from recent losses with a recent uptick also spurred after markets absorbed supply from France and Spain.

Top European News

• Deutsche Bank Mismarked 37 Deals Like Paschi’s, Audit Executives at Deutsche Bank arranged 103 similar deals with total value of EU10.5b for 30 clients: audit.
• EasyJet Posts First Profit Drop Since 2009 on Terror, Brexit: Pretax profit for 12 months to Sept. 30 expected to have been in the range of GBP490m-GBP495m; est. EU516m.
• Osram Soars on Report Sanan Optoelectronics Is Preparing Bid: Sanan preparing to offer ~EU70/share.
• German Factory Orders Surge as Domestic Demand Rebounds: Orders rose 1% vs July, when they climbed a revised 0.3%.
• Norway Raises Oil Wealth Spending to Back Economic Recovery: Govt increasing oil money spending to NOK225.6b in 2017, equal to 3% of fund, according to budget documents obtained by Bloomberg.
• Distressed Opportunities Better in Europe Than U.S.: Marks: Opportunities are relatively plentiful in Europe, almost nonexistent in the U.S., Oaktree co-chairman Howard Marks said

In FX, the greenback extended its longest run of gains against the Japanese currency since July 2014. The market-implied probability of a Fed hike by December rose to 62 percent from 51 percent at the start of last week, according to futures data compiled by Bloomberg. Non-farm payrolls data Friday will show U.S. employers added 172,000 jobs in September, compared with 151,000 in the previous month, according to a Bloomberg economist survey. The dollar added 0.2 percent to 103.66 yen at 10:42 a.m. in London, after strengthening more than 3 percent in the previous seven days.The pound resumed its decline as concern the U.K. is headed for a deal that would deny it unfettered access to the European Union’s single market prompted investors to keep selling. The slide followed a recovery on Wednesday, when traders took advantage of sterling’s drop to a 31-year low against the dollar and the weakest level since 2011 versus the euro to buy.

In commodities, crude oil declined 0.1 percent to $49.76 a barrel in New York, after advancing 2.3 percent to a three-month high on Wednesday. U.S. stockpiles fell below 500 million barrels last week for the first time since January, official data show. The oil rally will stall at $55 a barrel, according to Goldman Sachs Group Inc.“ There is a bit of a cap for oil at about $50 because above that level, once we head up toward $55 a barrel, there’s concerns that U.S. shale producers will jump back into action,” said Michael McCarthy, chief market strategist in Sydney at CMC Markets. “The draw in crude stockpiles is clearly one of the factors contributing to the positive momentum.” Gold fell 0.1 percent, extending its losing streak to eight days, the longest since May. Nickel gained for the first time this week in London as investors assess a Philippines mining audit that could prompt shutdowns in the world’s biggest supplier, and news that Indonesia may resume some sales of nickel ore.

Looking at today’s calendar there isn’t a huge amount of data to highlight. This morning in Europe we’ll get factory orders in Germany for the month of August while at lunchtime we’ll get the latest ECB meeting minutes from the September meeting. A reminder that this was the meeting where there was an element of market disappointment given that there was no obvious indication that a QE extension announcement was around the corner. This afternoon in the US the only data due out is the latest weekly initial jobless claims print. Away from the data the ECB’s Praet is due to speak this afternoon in NY.

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities trade with little in the way of direction with Deutsche Bank still a key source of focus for markets amid reports the German Government have contacted the DoJ
• A very quiet morning in FX, where consolidation mode is clearly in play ahead of the US payrolls release tomorrow
• Looking ahead, highlights include US Challenger Job Cuts, ECB Monetary Policy Minutes, US Initial Jobless Claims and Draghi (Dove), Coeure (Dove) and Praet (Soft Dove) all speak
• Merkel says U.K. must first trigger Article 50 before Brexit talks begin; sees risks in letting states ignore four EU freedoms
• Abe says can’t exit deflation without bold monetary policy; adds that finance minister is in charge of FX rate stability and that depletion of bonds will pose a problem for BOJ buying
• Japan finance minister Aso emphasizes that the G-7 and G-20 had agreed to avoid competitive currency devaluations
• Liikanen says ECB must be aware of risks related to low rates
• Deutsche Bank mismarked 37 loans like Monte Paschi’s, audit says

US Event Calendar

• 7:30am: Challenger Job Cuts y/y, Sept. (prior -21.8%)
• 8:30am: Initial Jobless Claims, Oct. 1, est. 256k (prior 254k)
• 9:45am: Bloomberg Consumer Comfort, Oct. 2 (prior 41.6)
• 10am: Freddie Mac mortgage rates
• 10:30am: EIA natural-gas storage change

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DB's Jim Reid concludes the overnight wrap

As has been the case for nearly a decade, central bank thoughts continue to dominate markets. Yesterday's strong ISM (more below) and the previous day's ECB taper talk helped push bond yields still higher yesterday (also see below) with some wondering whether November might be a live meeting for the Fed (highly unlikely in our view). Whilst we think it's premature to talk ECB tapering, it's clear to us that central bankers around the globe are having to face up to the law of diminishing returns of a continuation of current monetary policy. We are therefore slowly seeing a subtle shift in emphasis. The Fed have seemingly lowered the bar for rate hikes, the BoJ is in a state of flux and the ECB - if Tuesday's story has any credibility - is at least starting to debate (maybe on the fringes only for now) whether the status quo makes sense. A big theme of our long-term study this year was that we thought we were around a multi-decade super cycle inflection point in economics, politics and policy (amongst other things). This certainly included monetary policy and the bond market was a big potential victim of this over the medium term at least in real terms. For choice we still think there could be one last bond market hoorah when the next downturn arises but that should herald the fiscal boosts needed to try to reflate the system and put upward pressure on bond yields. At this stage central banks will likely need to be back buying in size again to finance this but it’s unlikely they'll be able to keep nominal yields as low as this when policy changes. So in conclusion this monetary only era is slowly coming to an end and although yields have to stay relatively low for financial repression to work, we may see the middle of this decade (i.e. around now) as the inflection point for global nominal yields.

Back to that US non-manufacturing ISM reading for September now. It printed at 57.1 which, was not only well ahead of where the market consensus was pegged (53.0), but also up a bumper 5.7pts from August. It put the reading at the highest since October 2015 and the monthly jump was the most on record with data for the series going back to 1997. The details of the report were equally positive. New orders jumped to 60.0 from 51.4, business activity jumped to 60.3 from 51.8, new export orders surged to 56.5 from 46.5 and employment rose to 57.2 from 50.7.

Bond yields were immediately higher following the data. 10y Treasury yields were up as much as 4bps in a short space of time to touch an intraday high of 1.728% which is only a couple of basis points shy of the pre-Brexit levels, however that move was pared back a bit into the close with the 10y finishing the day just shy of 2bps higher at 1.703%. Still, that’s a near 17bps move higher in yield since the recent lows at the end of last month. European bond yields were already up on the ECB story but the data just accelerated the sell off further. 10y Bund yields ended up moving 5bps higher to -0.008% and are now up nearly 12bps this week alone. The peripherals were also 6-7bps higher yesterday and 10y BTP’s in particular are now at the highest yield (1.358%) since June.

The move higher in rates unsurprisingly weighed on rate sensitive sectors of the equity market like REITS and utilities with European equities closing lower as a result. The Stoxx 600 finished -0.55% for its first down day since September 26th. Those sectors in the US were also under pressure but the losses were more than offset by a rally in financials while energy names were also given a boost following a +2.34% bounce for WTI on the back of an unexpected decline in US stockpiles last week. The S&P 500 finished +0.43% at the closing bell. Elsewhere, credit markets also traded with a generally positive tone. In FX the US Dollar initially rallied post-data but pared gains into the close to finish flat, while Gold (-0.13%) fell for the seventh successive session.

Yesterday’s strong non-manufacturing ISM also added a layer of complexity to the ongoing debate about the US jobs situation, especially ahead of tomorrow's payrolls. As we noted above, the employment component picked up 6.5 points to 57.2 - the biggest climb on record. When looking at the composite ISM employment series (manu and non-manu) and regressing it against payrolls, DB's Jerome Saragoussi yesterday suggested that it is now consistent with 230k on payrolls. The equivalent figure was 30k last month. If we smooth the data by regressing the 2m MA of the ISM series with 3m MA of payrolls then we get a 130k number. Jerome adds that in 2016 ISM employment has generally been soft and under predicted payrolls. However the softness in ISM seems to have been reflected in lower average weekly hours (AWH) and thus lower labor input growth rather than much lower NFP. It is therefore possible that the recovery yesterday in ISM employment gets reflected in higher AWH rather than particularly strong job creation.

That employment component data in the ISM print seemed to overshadow what was a relatively uneventful but slight disappointing ADP reading. The 154k print for September was marginally below the consensus of 165k and follows a 2k downward revision to the August reading of 175k. It was actually the lowest reading since April but still fairly in keeping with a strong but cooling labour market view. It certainly didn’t feel like a big enough miss to sway payrolls expectations, especially given the ISM number. Market consensus is running at 172k for tomorrow's payrolls.

Switching our focus over to the latest in Asia this morning now where, despite WTI giving up half a percent or so in the early running, the rally for Oil yesterday has helped energy stocks to rally in the region, with bourses up as a result. Indeed the Nikkei (+0.63%), Hang Seng (+0.43%), Kospi (+0.31%) and ASX (+0.48%) have all edged up. Sovereign bond yields, particularly in Australia and New Zealand (where 10 yields are up 3bps) are generally higher, while in the FX space Sterling (-0.19%) has seen a small amount of additional selling pressure this morning.

Yesterday was also global PMI day with the final services and composite revisions released. In the US the services reading for September was revised up 0.4pts to 52.3 at the final cut which, combined with the manufacturing print, puts the composite at 52.3 and the highest since April. In Europe the final composite PMI for the Euro area came in unchanged at 52.6 while the services PMI was revised up a smidgen (0.1pts) to 52.2. As expected the first look at the periphery revealed some deterioration for both Italy (50.7 from 52.3) and Spain (54.7 from 56.0) in the services sector. Overall however, our Europe economists believe that the data is consistent with +0.3% qoq GDP growth in Q3. That said, recent hard data including the August retail sales print yesterday (-0.1% mom) have been on balance less positive which adds extra focus on the August industrial production prints due over the next week.

Meanwhile the run of decent data for the UK continues. The composite PMI in September printed at 53.9 which puts it now at 6.4pts above the July post-Brexit lows and at the highest level since January. In terms of the rest of the US data, factory orders (+0.2% mom vs. -0.2% expected) surprised to the upside in August although the bumper July reading was revised down from +1.9% mom to +1.4% mom. Finally the August trade balance revealed a slight widening in the deficit to $40.7bn from $39.5bn.

Before we look at the day ahead, the Fed’s Lacker was vocal once again yesterday. He maintained his hawkish stance saying every meeting is live and that ‘there are signs that inflation is heating up’ and so ‘there’s a strong case to raise rates more rapidly’. Speaking overnight, the Fed Vice Chair Fischer has said that ‘ultra-low interest rates are not necessarily here to stay, especially if the right policies are put in place to address at least some of their root causes’. Fischer also highlighted that ‘policies to boost productivity growth and the longer run potential of the economy are more likely to be found in effective fiscal and regulatory measures than in central bank actions’.

Looking at today’s calendar there isn’t a huge amount of data to highlight. This morning in Europe we’ll get factory orders in Germany for the month of August while at lunchtime we’ll get the latest ECB meeting minutes from the September meeting. A reminder that this was the meeting where there was an element of market disappointment given that there was no obvious indication that a QE extension announcement was around the corner. This afternoon in the US the only data due out is the latest weekly initial jobless claims print. Away from the data the ECB’s Praet is due to speak this afternoon in NY.