Deutsche Bank

There is a high hurdle following October's surprisingly strong gain of 271,000 jobs. On the other hand, Wall Street is confident we would have to see a significantly lower number, somewhere in the 100,000 range or even lower, — and weakness in other parts of the report, such as the unemployment rate, hourly wages and weekly hours — for the FOMC to postpone a rate hike into next year.

Mario Draghi is on deck Thursday morning and market expectations could scarcely be higher. In fact, Draghi is widely expected to execute the Keynesian trifecta, i) a rate cut, ii) expansion of QE, and iii) extension of QE duration. The ECB has indeed gained a reputation for over-delivering, but as SocGen puts it, "with high expectations comes a high risk of disappointment." 

• Yellen, in back-to-back appearances, could close out era of zero rates (Reuters)
• ECB stimulus hopes keep Europe stocks at three-month high (Reuters)
• ECB to Test the Limits of Its Bond-Buying Program (WSJ)
• Watch for U.S. recession, zero interest rates in China next year, Citi says (Reuters)
• Euro’s Loss Being Yen’s Gain May Be Headache for BOJ (BBG)
• Yahoo Board to Weigh Sale of Internet Business (WSJ)
• Islamic State Prevents Civilians From Fleeing Iraqi City of Ramadi (WSJ)

“If the ECB merely does on 3 December what is effectively priced by the market, we could collectively wake up on 4 December feeling a bit deflated, like a child discovering on Christmas day that his parents ‘only’ gave him what he/she had asked for, without the ‘little extra’ that would have kept him/her smiling all day long."

Despite distressed-debt funds suffering their worst losses since 2008, mainstream apologists continue to largely ignore the carnage in the credit market (even though veteran bond managers have urged "it's not just energy, it's everything.") With the number of loan deals pricing below 80 (distressed) at cycle peaks, and "a less diverse group of investors holding a lot more bonds," price swings continue to be wild but as DB's Melentyev warns, initially "all of this looks random when there is no underlying news to support the big moves. But eventually a narrative emerges -- maybe we have turned the corner on the credit cycle."

The world is awash with debt. With central banks increasing their balance sheets through quantitative easing, simultaneously pushing down interest rates and taking huge chunks of the market out of circulation, investors have had to stray beyond developed market government bonds in search of yield.

"... the next 12-18 months will be divided into three periods corresponding to the three distinct regimes of market dynamics. They can be summarized by the following modes of the curve: short-term tactical bear flatteners on the back of a Fed liftoff story, followed by volatile bear steepeners of the “taper-tantrum” type around mid-year, and a bull-flattening finale as structural factors deem rate hikes to be a policy mistake."

"We have determined that applying a negative rate was a more transparent and fairer solution for our clientele. This decision on negative rates is costing us a lot of money -- pretty much the equivalent of our entire annual profit last year."

"The hardest questions we are trying to reconcile here are how is that possible to see all these signs of weakness under the surface being balanced by very strong equity markets and upbeat employment picture. One of these sides has to be wrong..."

• Brussels on Edge as Lockdown Continues (WSJ)
• Stocks Pare Decline as Crude Oil Erases Drop on Saudi Comments (BBG)
• Italy’s Eni Plans to Pump Arctic Oil, After Others Abandon the Field (WSJ)
• Treasuries Decline as Economists Say GDP to Be Revised Higher (BBG)
• Why the Housing Rebound Hasn’t Lifted the U.S. Economy Much (WSJ)
• Argentina Fever Is Back for Investors as Kirchner Rival Triumphs (BBG)

As a result of the global commodity weakness, global stocks have fallen for the first time in six days as the sell-off in commodities continued, dragging both US equity futures and European stocks lower. However, putting this in context, last week the MSCI All Country World Index posted its biggest weekly gain in six weeks: alas, without a coincident rebound in commodity prices, it will be merely the latest dead cat bounce.

The hardest questions we are trying to reconcile here are how is that possible to see all these signs of weakness under the surface – including weak commodities, tightening credit, retrenching consumer spending – being balanced by very strong equity markets and upbeat employment picture. One of these sides has to be wrong in its assessment of the current macro environment, and seeing both of them extending well into the future appears unlikely to us.

"Can the government maintain this strategy of flooding the oil market? In our view, it is unlikely that Saudi leaders would want to exacerbate its ongoing reserve drain by pushing prices below $40/bbl. After all, pressure will quickly build on the riyal’s 30 year peg to the USD if Brent crude oil prices keep falling."