U.S. equity index futures fell, with European, Asian stocks also declining before the September payrolls data, following the stunning 2-minute "flash crash" meltdown in sterling which plunged as much as 6.1%, the most since Brexit and is set for its biggest weekly loss since 2009.

Sterling tumbled 2.1% to $1.2346, after earlier reaching $1.1841, the lowest since March 1985.

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As observed last night, while it is unclear what ultimately unleashed the plunge in the pound, some have blamed algos as being responsible for the move, while others suggesting a possible "fat finger", either accidental or premeditated as the catalyst, exacerbated by low volumes during thin Asian pre-open trade. Others pointed to comments by French President Francois Hollande saying the U.K. must suffer the consequences of leaving the European Union, although that theory has been largely dismissed as Hollande did not say anything the market was not aware of.

Derek Mumford, a director at Rochford Capital said he and his colleagues were searching for a reason for the pound’s plunge, scanning news-agency reports, and the internet. “The speed of the move looks like a kind of a flash crash, some sort of failure,” Mumford said, adding that sterling is set to drop to $1.15 in the coming weeks if it doesn’t recover above $1.28. “I’m sort of struggling to justify it. I don’t think there’s any shock that the EU will be going for a hard Brexit.”

In any case, as Ulrich Leuchtmann, head of currency strategy at Commerzbank in Frankfurt told Bloomberg, “this is not something you would expect in a half-efficient market,” said . “We have a liquidity situation which has eroded massively over the last few years and policy makers have largely ignored it. All the regulation that we have in place, for good reason, has the side-effect that liquidity in the FX market is much more shaky and fluctuating heavily, and we have times when it’s extremely low, especially in Asian trading.”

“It caught the market wrong-footed and triggered a lot of algorithmic selling,” said Hugh Killen of Westpac. “We didn’t see any significant demand for sterling off the low. It was more of the point that the selling subsided and the market calmed and it reverted back to a level that was more realistic for the day.”

Gold, crude, metals rise with dollar. Today's top news stories include pound sterling’s flash crash, the September payrolls, Hurricane Matthew’s landfall in Florida, and Deutsche Bank’s consideration of capital options.

Ahead of payrolls, the dollar climbed to 10-week high and equities retreated on concerns a strong jobs report may bolster the case for the Federal Reserve to raise interest rates this year.The odds of a rate increase this year have climbed to 64 percent after reports showed the fastest expansion in services in almost a year, a rebound in manufacturing and the second-lowest level of jobless claims last week in four decades.

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“Should non-farm payrolls exceed expectations, I would call it a positive disappointment as the equity market could get a little worried about further rate hikes earlier next year, after a likely increase in December,” said Christian Stocker, a strategist at UniCredit Bank AG in Munich, Germany. “The economy is strong enough to withstand a rate increase. But if the market expects we will see more rate hikes than currently anticipated then that could be a burden for relatively high valuations in the U.S.”

The Bloomberg Dollar Spot Index strengthened for a fifth day as better-than-estimated economic data this week fueled bets for rate increases. Stocks fell with bonds and gold headed for its worst week in almost two years. The pound failed to recover all of its losses after the biggest intraday slide since the Brexit referendum. Oil extended gains above $50 a barrel.

The Stoxx Europe 600 Index fell 0.3 percent, with almost all industry groups except miners declining. The benchmark is on course for a 0.5 percent drop this week, as its longest stretch without losses in almost a year unraveled amid concern the European Central Bank may turn less accommodative. Germany’s Innogy SE was little changed, after RWE AG’s green energy business started trading in Frankfurt above the issue price of its initial public offering, Europe’s biggest since Glencore Plc in 2011. RWE slid 4.5 percent.

S&P 500 Index futures retreated 0.3% , after U.S. equities closed little changed on Thursday. A debate between presidential candidates Hillary Clinton and Donald Trump is set to take place on Sunday night in St. Louis.

The yield on U.S. Treasuries due in a decade increased by one basis point to 1.75 percent, climbing for a sixth day. Yields on similar-maturity sovereign debt in Australia and New Zealand jumped more than 20 basis points this week and Germany’s turned positive on Friday for the first time in two weeks. “If the payrolls number comes out around 200,000 or so, just slightly above where people are expecting, there could be a little bit of a selloff” in Treasuries, said John Gorman, the Tokyo-based head of non-yen rates trading for Asia and the Pacific at Nomura Holdings Inc., a primary dealer in Japan and the U.S. “The Fed needs to be a little bit more concerned about what’s going on in the U.S. rather than externally, and the economy is improving. I think they’ll probably be looking to hike in December.”

Market Snapshot

• S&P 500 futures down 0.3% to 2151
• Stoxx 600 down 0.4% to 342
• MSCI Asia Pacific down 0.3% to 140
• US 10-yr yield up 2bps to 1.75%
• Dollar Index up 0.28% to 97.04
• WTI Crude futures up 0.4% to $50.66
• Brent Futures up 0.4% to $52.71
• Gold spot up less than 0.1% to $1,255
• Silver spot up 0.2% to $17.36

Top Global News

• Millions Ordered to Flee as Matthew Bears Down on Florida: Storm downgraded to category 3, with winds of 120mph; is expected to make landfall overnight near Cape Canaveral.
• Pound Flash Crash Has Traders Blaming Algos for Selling Frenzy: 6.1% decline drove sterling as low as $1.18; at least one electronic trading platform recorded transaction at $1.14.
• Deutsche Bank Said to Weigh Capital Options With Banks: Bank holding informal talks with securities firms to explore options including raising capital should mounting legal bills require such.
• Goldman Said to Receive Fed Warning on UFC Buyout Debt: Federal Reserve bank supervisors cautioned Goldman over risks in deal it arranged to fund $4b buyout of Ultimate Fighting Championship debt.
• Verizon Asks Yahoo for $1b Discount in Deal After Hack: NYPost: AOL head Tim Armstrong flew to California to meet with YHOO execs, discuss price reduction.
• Honeywell Profit Misses Forecast on Weaker Aerospace Sales: 3Q Earnings were about $1.60 a share, less than the outlook of $1.67 to $1.72.
• Apple Said to Plan Improved Cloud Services by Unifying Teams: Co. plans to unify separate internet services groups to single campus to better compete with Google, Amazon.com in cloud.
• United Technologies Cuts Pension Liabilities by $1.77b: Co. transferring obligations to insurer Prudential, also via plan to offer lump-sum payouts to some retirees.
• Facebook Testing VR Headset That Doesn’t Need PC Connection: Co. working on new virtual reality product that’s advanced than Samsung Gear VR; doesn’t require PC connection.
• Gap Climbs After Sept. Sales Decline Not as Bad as Feared: Same-store sales gained 4% at Old Navy; analysts had projected growth of <1%.
• Elon Musk’s Wall Street Supporters Change Views on Tesla: Goldman has cut its recommendation on Tesla following similar move by Morgan Stanley

A largely dazed trading session in Asia started with equity markets trading mostly lower following a similar lead from the US ahead of today's NFP report, with markets also jittery following a GBP flash crash. ASX 200 (-0.3%) opened lower as gold miners suffered from continued declines in the precious metal, although gains in energy with crude above USD 50.00/bbl stemmed losses in the index. Nikkei 225 (-0.2%) was cautious amid a pullback in USD/JPY, while Hang Seng (-0.4%) also traded subdued as participants await the latest US jobs data and attempt to make sense of a collapse in GBP/USD which saw the pair drop below 1.2000 before paring the majority of the move on a reclaim of 1.2400. 10yr JGBs traded mildly higher amid the cautious tone seen in the region, while the BoJ were also in the market under its massive bond-buying program.

Top Asian News

• China’s HNA to Buy CIT Plane-Leasing Business for $1b: Aim is to be No. 1 plane-leasing company, Avolon CEO says.
• Offshore Yuan Heads for Six-Year Low as Dollar Surges on Fed: Discount to Shanghai rate widest since June amid China holiday.
• China Foreign-Exchange Reserves Drop as Yuan Pressures Build: Decline a sign of intervention and outflows, Nomura says.
• Bottom-Feeder Stock Picker Crushes Peers With Obscure Japan Bets: Tatsuro Nigauri’s fund is beating 99% of competitors.
• Samsung’s Profit Engines Keep Running Even Amid Note 7 Recall: 3Q op. profit 7.8t won vs est. 7.58t won.

Looking at Europe, aside from FX, trade has been tentative - in terms of indices The FTSE 100 (+0.6%) outperforms its counterparts, benefiting from the weakness in sterling after the crash. Most of the other European majors languish in negative territory, but only marginally so and it seems we will have to wait for the US to come to market to give clear direction to equities. From a fixed income perspective, Bunds and USTs have extended yesterday's move to the downside ahead of today's US NFP report while Gilts continue to lag the fixed income space amid continued speculation that the new government's fiscal stimulus will require the issuance of more Gilts.

Top European News

• Total Sells Chemicals Unit to Carlyle Group for $3.2b: Sale values Atotech at 11.9x 2015 adjusted Ebtida.
• Innogy Trades Above Offer Price After Biggest IPO Since Glencore: Unit contains grid, renewables, retail arms of its parent, RWE; opened at 3.6% more than its offer price.
• ABN Amro Gains After Rejecting Nordea Proposal to Buy Bank: Nordea Chairman said to have proposed reverse takeover via share swap that would have enabled Nordea to escape Sweden’s stringent capital requirements.
• Delta Lloyd Rejects NN Group’s Unsolicited Bid: Dutch insurer said financial terms aren’t acceptable, don’t reflect benefits of consolidation.
• Telefonica Said to Mull Selling Telxius Stake After IPO Flop: Co. considering selling stakes in its infrastructure business after Telxius IPO fell through last month.
• Norway Wealth Fund Gains 4% in 3Q as Stocks Rise: Fund’s return of NOK240b comprised stock portfolio +6%, bonds +0.9%, real estate holdings +2.4%.
• German Production Jumps Most Since January on Investment: Output +2.5% vs July, when it dropped 1.5% m/m; median forecast was +1%.

In FX, aside from the furious sterling move, the dollar gained against all but the yen among its 16 major peers, with the Bloomberg Dollar Spot Index rising 0.4 percent on Friday to the highest since July, as of 10:50 a.m. in London. The U.S. probably added 172,000 people to payrolls and the unemployment rate held steady at 4.9 percent, according to the median estimates of economists surveyed by Bloomberg. The report may also show average hourly earnings rose. Fed officials set to speak Friday include Cleveland Fed President Loretta Mester, who said this week that the case for a rate increase would be “compelling” when the next policy review concludes on Nov. 2. Fed Vice Chairman Stanley Fischer, Governor Lael Brainard and Kansas City Fed President Esther George are all scheduled to talk in Washington. The yuan in offshore trading headed for its weakest close in six years, exacerbating depreciation pressures on the domestic exchange rate when trading resumes in Shanghai on Monday. The overseas rate has dropped 0.6 percent this week, widening its discount to the onshore spot price to the most since June. China’s central bank on Friday reported an $18.8 billion decrease in the nation’s foreign-exchange reserves for September, spurring speculation it sold dollars to support the currency.

In commodities, gold held near a four-month low. It tumbled 4.7 percent this week, its biggest loss since 2014, as growing expectations for a Fed rate rise boosted the greenback. Base metals traded higher, paring weekly losses of more than 2 percent for copper, nickel and lead. Copper prices are likely to “remain subdued” over the rest of the year, as rising supply continues to outpace global consumption, Australia’s Department of Industry, Innovation and Science said Friday in a report. Crude oil rose 0.5 percent to a four-month high of $50.69 a barrel in New York, extending this week’s rally to more than 5 percent. U.S. stockpiles shrank below 500 million barrels last week for the first time since January and the Organization of Petroleum Exporting Countries pledged to cut production. The group will be joined by non-OPEC Russia for talks in Istanbul next week regarding the implementation of output reductions. Soybeans gained for a second day as demand for U.S. exports offset record harvests from Brazil and Argentina. Futures for November climbed as much 0.5 percent to $9.63 1/4 a bushel on the Chicago Board of Trade. Corn and wheat also rose.

Looking at today’s calendar now, it is all about the September employment report with payrolls, unemployment and average hourly earnings amongst the data released. Also due out later on, will be the final revision to August wholesale inventories, along with the latest consumer credit print. Away from the data, there’s a fair bit of Fedspeak scheduled. Fischer, Mester, George and Brainard are all on the cards while over at the ECB we’ve got Praet due to speak again at 2pm BST. Today is also the commencement of the annual meeting of the IMF and World Bank in Washington with a number of speakers due over the next couple of days.

US Event Calendar

• 8:30am: Change in Non-farm Payrolls, Sept., est. 172k (prior 151k); Unemployment Rate, Sept., 4.9% (prior 4.9%)
• 10am: Wholesale Inventories m/m, Aug F, est. -0.1% (prior -0.1%)
• 10:30am: Fed’s Fischer speaks in Washington
• 12:45pm: Fed’s Mester speaks in New York
• 3pm: Consumer Credit, Aug., est. $16.5b (prior $17.713b)
• 3:00pm: Fed’s George speaks in Washington
• 4:00pm: Fed’s Brainard speaks in Washington

Bulletin Headline Summary from RanSquawk and Bloomberg

• GBP falls in 'flash crash' overnight with some noting an algo behind the move, a possible "fat finger" and moves exacerbated by low volumes during Asian trade
• Aside from FX, trade has been tentative - in terms of indices The FTSE 100 (+0.6%) outperforms its counterparts
• Looking ahead, highlights include US NFP and Unemployment Rate and Speakers Including ECB's Praet, BoE's Forbes, Fed Vice Chair Fischer, George and Brainard
• BOE says it’s “looking into” cause of pound flash crash
• ECB’s Vasiliauskas says Deutsche Bank doesn’t pose systemic risk in interview with WSJ; says ECB’s governing council hasn’t discussed bond-buying tapering
• Deutsche Bank said to weigh options, including raising capital, with securities firms
• We should stop talking about United States of Europe, Juncker says
• Riksbank’s Skingsley says Swedish inflation is heading in the right direction
• Renzi says Italy referendum is last opportunity for change in interview with La Stampa

DB's Jim Reid concludes the overnight wrap

Indeed today’s payrolls report is actually the last one before the Fed meet next month. After this we then get two more before the December FOMC meeting. One would imagine that it would take an extraordinarily high payroll number today, along with the other employment components being very strong, for a November rate hike to really be in play with the market currently pricing in a probability of just 24% and with the Presidential Election a big uncertainty hurdle to get over. Most will be looking further afield to the end of the year however with pricing for a December hike now around 64% and up from closer to a coin toss nearly two weeks ago. Given the prospect of another two payrolls reports prior to then though, along with a raft of other Q4 data, it’s hard to see a print anywhere within the survey range (currently 125k to 220k with the consensus at 172k) as materially changing what’s currently priced in. As DB’s Alan Ruskin noted, a print north of 250k could make things interesting while it would need a reading below 100k to seriously reduce the December odds. Our US economists are at the lower end of the market range today with a 130k forecast. A reminder also that August payrolls were 151k.
As always it’s also worth keeping an eye on the other important components of the employment report including the unemployment rate (expected to hold steady at 4.9%), average hourly earnings (+0.3% mom expected) and average weekly hours (expected to nudge up to 34.4hrs from 34.3hrs). The report is due out at 1.30pm BST.

So while equity markets were fairly uninspiring yesterday ahead of today’s data, the two big themes in markets at the moment in the form of the selloff in Treasuries and the collapse in Sterling continue to gain traction. We’ll start with the latter as it’s been dominating the wires in the morning session in Asia today. Yesterday Sterling (-1.04%) was down sharply again and in the process marked a fresh 31-year low at $1.262. The freefall has continued this morning however and at one stage the Pound collapsed nearly 8 big figures to an intraday low of $1.1841 (or just over -6%) in just 2 minutes. That’s the biggest intraday drop since the Brexit fallout on June 24th and the lowest level since May 1985. It has rallied back since to $1.244 but is still down -1.37% this morning as we go to print. Much of the blame is being laid on algo-driven orders at a time of day when liquidity is at its thinnest and it’s a stark reminder of just how fragile markets can be at times when the liquidity just isn’t there.

Yesterday’s move lower for Sterling also sent Gilt yields surging higher with the 10y up 5.5bps to 0.868% while that relationship between weaker Sterling and stronger UK equity markets decoupled, at least temporarily, with the FTSE 100 closing -0.47%. There didn’t appear to be any new news that triggered yesterday’s leg lower for the Pound and the move came despite Chancellor Hammond doing his best to soothe the market with calming words although he did acknowledge that the UK’s financial sector would be badly hit should the UK have to adhere to the rules of WTO once it left the EU.

Staying with the UK, yesterday the Bank of England confirmed that it had bought £507m of corporate bonds in the first week of purchases under its new CBPS. Given their initial guidance was for purchases of up to £10bn over 18 months, the implied run rate in the first week is pretty impressive and a represents a bit of a shock and awe start to the program.

Meanwhile, 10y Treasury yields were another 3.5bps higher yesterday and closed at 1.738% which is the highest yield now since June 23rd. It’s the fifth session in a row that yields have spiked higher and it means that in October so far, the yield is already over 14bps higher. You have to go back to June 2015 to find the last time that Treasuries had a worse four-day start to a month. The US Dollar index also rallied +0.67% yesterday which put pressure on precious metals again (Gold -0.98%, Silver -2.38%).

Elsewhere, the S&P 500 (+0.05%) ended up close to unchanged but did wipe out earlier losses of over -0.40% after some ECB speak sought to quash or at least try to downplay the ECB taper story from earlier this week. In an interview with Market News in the late afternoon, Vice-President Vitor Constancio said that the ECB is still in ‘accommodative mode’ and that QE ‘will go on until we are satisfied that inflation is truly on the path to our objective, and at least until March of next year’. Meanwhile, ECB board member Peter Praet said that the ECB ‘remain committed to preserving the very substantial amount of monetary support that is embedded in our staff projections’.

This morning in Asia, away from the focus on FX markets, bourses are trading with a broadly weaker tone albeit on lighter volumes. The Nikkei (-0.18%), Hang Seng (-0.43%), Kospi (-0.34%) and ASX (-0.15%) are all a touch lower. US equity index futures are also down slightly. Despite China markets still being closed, the latest China foreign reserves data released this morning showed total reserves declined nearly 0.6% from the prior month to $3.17tn. That was a bit more than expected and marks the third straight month of contraction.

Yesterday was a pretty quiet day for data. In the US the sole release was the latest weekly initial jobless claims print which came in at 249k and down 5k from the prior week. That’s the lowest reading since April 16th. Away from this the only data in Europe came from Germany where factory orders in August rose more than expected (+1.0% mom vs. +0.3% expected).

Looking at today’s calendar now, this morning in the European session expect most of the focus to be on the August industrial production reports out of Germany, France and the UK. We’ll also get trade data from the latter two while the September Halifax house price survey is also due to be released in the UK. This afternoon is of course all about the aforementioned September employment report with payrolls, unemployment and average hourly earnings amongst the data released. Also due out later on, will be the final revision to August wholesale inventories, along with the latest consumer credit print. Away from the data, there’s a fair bit of Fedspeak scheduled. Fischer (3.30pm BST), Mester (5.45pm BST), George (8pm BST) and Brainard (9pm BST) are all on the cards while over at the ECB we’ve got Praet due to speak again at 2pm BST. Today is also the commencement of the annual meeting of the IMF and World Bank in Washington with a number of speakers due over the next couple of days.