Two days ago, when observing how the Volkswagen scandal could become a systemic threat to both the German and the European economies we quoted Theo Vermaelen, a finance professor at INSEAD who said "if nobody else has done it, the damage would be limited. If it looks like it's more companies, not just Volkswagen, it would be a major problem for the German car industry, and the German economy overall." We added "that's the question German investors are wrestling with: was it just one cockroach. If it was more, the ultimate outcome will (not may) be more QE from the ECB because with Europe tentative recovery also sputtering after 6 months of ECB QE, a steak through the heart of Germany's most important industry, will be just the black swan that sends Europe into a recession."

Earlier this morning it seems the case for more ECB easing is pretty much set following a report by German Autobild that BMW's X3 xDrive 20d sport utility vehicle "emitted as much as 11 times the European limit for air pollution in a road test, adding to concern that the investigation weighing on Volkswagen AG may spread to other manufacturers."

According to Bloomberg the SUV was road-tested by the International Council on Clean Transportation, the same group whose tipoff led U.S. regulators to investigate a gap between Volkswagen AG diesels’ emissions in tests and on the road.

The company denied: "There is no function to recognize emissions testing cycles at BMW,” the Munich-based company said in a statement in response to the report. “All emissions systems remain active outside the testing cycles" adding that BMW said that there’s no system in its cars that responds to tests differently than it would operate on the road, but by then the damage was done and

BMW shares traded down 6.2 percent to 74.9 euros at 11:59 a.m. in Frankfurt after dropping as much as 9.3% earlier.

"There’s no suggestion BMW has done anything illegal,” said Juergen Pieper, an Frankfurt-based analyst with Bankhaus Metzler. “However, there are concerns for the long-term damage on the business with diesel cars for every manufacturer that builds cars with these engines."

Perhaps now we know the reason why BMW's new CEO Harald Krueger fainted last week during the Frankfurt motor show.

Shares of other German carmakers also declined. Daimler AG tumbled below €63 for the first time since November 2014. Volkswagen, which is at the heart of the probe and has lost about 20 billion euros in market value since Monday, recovered some of its losses, rising as much as 7.8 percent.

The news promptly ended the brief kneejerk rebound higher in European equities, which had rebounded earlier on positive German IFO data with expectations and business climate beating surveyed expectations, while current assessment missed expectation, however this failed to have a sustained reaction in the EUR, while elsewhere the USD-index heads into the North American crossover lower by around 0.1 % after seeing relatively muted price action overnight. Finally of note, NZD/USD saw strength after Fonterra revised its 2015/16 milk forecast upward, however mixed trade figures capped further advances in the pair.

In global central bank news - because lately that's all that matters - ahead of Janet Yellen's first post-FOMC speech in Amherst, MA on Inflation Dynamics and Monetary Policy in which the Fed chair will be expected to elaborate on last week's disappointing FOMC announcement, overnight two central banks lowered their interest rates with the Norges Bank unexpectedly lowering their deposit rate by 25bps to a record low 0.75%. 7 of the 17 surveyed analysts forecast a rate cut, citing weaker consumer and business surveys as well as a weaker oil outlook, however the majority of analysts believed that the central bank would hold off until later in the year.

As a result of the rate decision, NOK saw substantial weakness on the back of the release, slumping to its weakest level in more than 13 years versus the dollar after the nation’s central bank unexpectedly cut interest rates to an all-time low and said it may ease monetary policy further to support an economy that’s been battered by the collapse in oil prices.

The krone slid 2.1 percent to 8.4471 per dollar as of 10:11 a.m. London time after reaching 8.4861, the weakest since April 2002. It fell 2.3 percent to 9.4636 per euro, having touched 9.5076, the weakest level since Aug. 26. The Norwegian currency dropped the most against the Swiss franc among its major peers, slumping 2.7 percent. "The move is logical given what they did today,” Carl Hammer, chief foreign-exchange strategist at SEB AB in Stockholm, told Bloomberg. “I thought it was equally likely that they would remain on hold and send a very dovish message, because the krone is already weak. The rate path was reduced substantially. It’s a very dovish message.”

Elsewhere the Taiwan central bank also unexpectedly cut their key interest rate by 12.5 bps to 1.75%, with the news reported by sources ahead of the official release.

So much for all that underappreciated global growth. As a result of the two latest rate cuts, expect the US to import even more deflation, making any case for a US rate hike that much more improbable.

Asian equity markets traded mixed following the tepid close on Wall Street, with Japan underperforming on return from the elongated weekend . Nikkei 225 (-2.8%) played catch up to the recent weakness seen in global equities as Japanese manufacturing PMI (50.9 vs. 51.2) missed expectations, with the auto sector also pressured as it reacts to the Volkswagen emission scandal. ASX 200 (+1.5%) was underpinned by gains in banking names, while Shanghai Comp. (+0.9%) is mildly positive, albeit off its best levels after the PBoC injected CNY 80Bn at a longer term of 14 days which resulted to a net weekly injection of CNY 40Bn vs. Prev. CNY 140Bn drain. JGBs traded higher amid softness in Japanese equities, while the BoJ also entered the market to purchase JPY 780b1n in government debt.

As noted above, European equity markets (Euro Stoxx: -0.7%) have swung between gains and losses, initially moving higher after the IFO data, before moving back into negative territory, weighed on by BMW (-8.5%) after reports in German press that BMW emission tests for their X3 model could show worse results than that of the Volkswagen Passat . Elsewhere, notable US earning reports today include Accenture before the open on Wall St and Nike after the closing bell.

Fixed income markets have seen muted price action so far in today's session, with T-notes heading into US hours in modest negative territory ahead of the US USD 29b1n 7y Note auction, with the most recent auction saw the highest B/C since Nov'14.

The commodity market has seen strength this morning, bolstered by USD weakness with gold stronger by over USD 5, while WTI trades around the USD 45.00 handle to retrace some of the losses seen after yesterday's DoE inventories saw a smaller drawdown than yesterday's API headline, allied to an increase in US crude output. Looking ahead, today sees the EIA NatGas storage change data, expected to come in at 99bcf.

Of note Platinum fell to a 6-1/2-year low on Wednesday, on fears about reduced demand from the auto sector, where it is used in diesel catalysts to clean up exhaust emissions, while palladium, used in gasoline vehicles, surged 7 percent. Platinum has been hurt by news of Volkswagen AG's falsification of U.S. vehicle emission tests as investors believed it could affect demand for diesel cars. The price of palladium, the predominant metal used in gasoline catalysts, rose on speculation that the Volkswagen scandal could increase demand for gasoline vehicles.

Key events on today's calendar include US weekly jobs data and durable goods orders as well as comments from ECB's Praet and Fed's Yellen. Of note US data, including jobless claims, durables and home sales will be delayed today & not released to newswires 1st due to Pope's visit.

Bulletin Headline Summary

European equity have been weighed on by BMW after reports in German press that the Co.'s emission tests for their X3 model could show worse results than that of the Volkswagen Passat

The Norwegian and Taiwanese central banks have both cut interest rates, taking the number of central banks to cut rates this year to 40

Today's highlights include US weekly jobs data and durable goods orders as well as comments from ECB's Praet and Fed's Yellen. Of note US data, including jobless claims, durables and home sales will be delayed today & not released to newswires 1st due to Pope's visit

Treasuries steady with global markets in disarray before Yellen speech at 5pm ET; week’s auctions conclude with $29b 7Y notes, WI yield 1.859% vs 1.930% in August.

Global stocks have fallen every day since Fed refrained from hike last week, with emerging market stocks falling more today, ZAR approaches record low, NOK tumbles after surprise rate cut

Norway’s central bank cut rates to an all-time low and said it may ease policy further as it seeks to rescue an expansion in western Europe’s biggest petroleum producer amid a plunge in oil prices

Germany’s Ifo institute business climate index climbed to 108.5, more than forecast, from a revised 108.4 in August; almost all responses were received before the news of Volkswagen AG’s emissions scandal

BMW AG fell as much as 9.3% after a German magazine reported that the X3 xDrive 20d sport utility vehicle emitted as much as 11 times the European limit for air pollution in a road test, adding to concern that the investigation weighing on Volkswagen AG may spread to other manufacturers

Martin Winterkorn amassed a $32 million pension before stepping down as CEO of VBW Wednesday, and may reap millions more in severance depending on how the supervisory board classifies his exit.

China’ leaders will further cut growth objective to 6.5%-7% for 2016, according to eight of 15 economists in a Bloomberg News survey conducted Sept. 17-22. Four said they expect a 6.5 percent goal.

Japan’s Abe unveiled a new economic growth target, switching his policy focus to children and the elderly after the passage of unpopular defense bills last week sparked scuffles in parliament and undermined public support

ECB handed EU15.5b to euro-area lenders in the fifth round of its long-term loan program to funnel money into the real economy; estimates in Bloomberg survey ranged from $35b- $120b

Wall Street is close to cutting billions of dollars from the cost of a derivatives rule as a debate among regulators over how tough the provision should be shifts in banks’ favor

Up and down the West Coast, home to the nation’s first $15 minimum wage laws, business owners are grappling with higher labor costs by experimenting with no-tip policies, employee ownership and trimming part-timers’ hours by working longer themselves

$7.7b IG priced yesterday, no HY. BofAML Corporate Master Index widens 1bp to +168; YTD range 172/129. High Yield Master II OAS holds at +598; YTD range 614/438

Sovereign 10Y bond yields mostly lower. Asian stocks mostly lower led by Nikkei, European stocks and U.S. equity-index futures decline. Crude oil, gold and copper gain

US Event Calendar

8:30am: Chicago Fed Nat Activity Index, Aug., est. 0.24 (prior 0.34)

8:30am: Initial Jobless Claims, Sept. 19, est. 272k (prior 264k)

Continuing Claims, Sept. 12, est. 2.240m (prior 2.237m)

8:30am: Durable Goods Orders, Aug., est. -2.3% (prior 2%, revised 2.2%)

Durables Ex-Transportation, Aug., est. 0.1% (prior 0.6%, revised 0.4%) Cap Goods Orders Nondef Ex Air, Aug., est. -0.2% (prior 2.2%, revised 2.1%) Cap Goods Ship Nondef Ex Air, Aug., est. 0.5% (prior 0.6%)

9:45am: Bloomberg Consumer Comfort, Sept. 20 (prior 40.2)

10:00am: New Home Sales, Aug., est. 515k (prior 507k)

New Home Sales m/m, Aug., est. 1.6% (prior 5.4%)

11:00am: Kansas City Fed Mfg Activity, Sept., est. -6 (prior -9)

1:00pm: U.S. to sell $29b 7Y notes

5:00pm: Fed’s Yellen speaks in Amherst, Mass.

DB Conludes the overnight wrap

There wasn’t a whole lot of direction in markets yesterday. The initial soft opening we got in European equities on the back of the weak China manufacturing data was quickly cancelled out as the sectors which had tumbled on Tuesday, namely autos and miners, reversed course. ECB President Draghi made mention that the asset purchase programme has sufficient flexibility to increase the scope or size of purchases if necessary, but ultimately struck a somewhat cautious tone around emerging markets in particular. The US session was characterized by a decent selloff in the energy complex, while Atlanta Fed President Lockhart – who’s been busy of late – highlighted some concern around the divergence of market pricing of Fed liftoff timing versus what committee members think and also suggested that markets are overreacting to developments in China.

The end result was one of modest gains in European equity markets with the Stoxx 600 closing +0.09%, but markets across the pond failing to recover from the energy related weakness with the S&P 500 (-0.20%) and Dow (-0.31%) declining for the fourth session in the last five post last week’s FOMC decision. It’s been fairly quiet so far in terms of data but with capital and durable goods orders and new home sales data this afternoon in the US there should be a bit more for markets to sink their teeth into. Arguably, the bigger focus however will be on Fed Chair Yellen who is set to speak this evening (10pm BST). The speech is due to be on ‘inflation dynamics and monetary policy’ and while no Q&A is scheduled, given the uncertainty in markets since the Fed last week there will be a lot of investors hoping for some calming words from the Fed Chair. Before we get there, it’s straight to the latest in Asia.

Refreshing our screens, it’s been a fairly mixed start across bourses in Asia this morning. Mainland China bourses have seen modest gains, with the Shanghai Comp and CSI 300 up +0.27% and +0.20% respectively at the midday break. The Kospi (+0.07%) is also up a tad while the ASX (+1.15%) is leading gains this morning. Elsewhere, it’s been a weaker start for the Hang Seng (-0.93%), while Japanese equities appear to be playing catch up with the rest of the region after markets opened for the first trading session this week following a public holiday. The Nikkei and Topix have tumbled -2.11% and -1.66% respectively as we go to print. Not helping sentiment in Japan this morning was a softer than expected flash manufacturing PMI (50.9 vs. 51.2 expected), down 0.8pts from August.

Back to yesterday and starting with ECB President Draghi first of all. In his quarterly testimony to European Parliament lawmakers, Draghi’s comments came across as one which highlighted a sense of patience and caution most of all. Specifically he said that ‘more time is needed to determine in particular whether the loss of growth momentum in emerging markets is of a temporary or permanent nature’. He then went on to say that the ECB needs to look closer at assessing the driving forces behind the recent slump in commodities and market turbulence. There were however some more reassuring words with regards to the ECB’s reaction function. Draghi told the audience that the ‘asset purchase programme has sufficient in-built flexibility’ and that ‘we will adjust its size, composition and duration as appropriate, if more monetary policy impulse should become necessary’.

Meanwhile and speaking for the third time this week, the Fed’s Lockhart largely reiterated much of what we had already heard this week, although the policymaker highlighted that with regards to market pricing of Fed liftoff, ‘if the probabilities put on various dates are way out of whack with what the committee members seem to be thinking, I would be concerned about that’. On the subject of China, Lockhart was of the view that ‘China is slowing to a still respectable pace of growth’ and that ‘there is a decent chance that the world is overreacting’.

Price action in the rates space was fairly muted yesterday. 10y Treasury yields closed the session 1.6bps higher at 2.151%, while 2y yields finished up 2.5bps at 0.701%. It was a similar story in Europe with 10y Bunds up just shy up a basis point to 0.594%. Draghi’s comments supported a stronger day for the Euro which finished firmed 0.59%. Much of the price action was in the Oil complex however where WTI (-4.06%) tumbled back below $45/bbl. Brent (-2.71%) also fell and the latest leg lower came despite a decent drop in US crude stockpiles, although a buildup in Gasoline stockpiles seems to be largely attributed to yesterday’s weakness. That helped lead energy stocks lower in the US while closer to home there was a decent rebound for the bulk of European carmakers, led by Volkswagen which closed up over 5%.

Yesterday was also flash PMI day with the September composite reading for the Euro area coming in a tad softer than expected (-0.4pts to 53.9; 54.0 expected) but as our European Economics colleagues note, still broadly consistent with a quarterly growth projection in Q3 of +0.5% qoq. There were almost identical falls for both the manufacturing (-0.3pts to 52.0; 52.0 expected) and services (-0.4pts to 54.0; 54.2 expected) prints while regionally a fall in the German composite (-0.7pts to 54.3; 54.6 expected) was offset by a larger than expected rise in France (+1.2pts to 51.4; 50.4 expected). Our colleagues note that the monthly fall in the Euro area PMI was driven by the non-core countries and they calculate that the flash reading implies a one point decline in the composite PMI’s of Italy, Spain and Ireland on average. Over in the US, the flash manufacturing PMI showed no change relative to last month’s print at 53.0, although the data was a touch ahead of expectations of a fall to 52.8.

Looking ahead to today’s calendar now. Much of the focus this morning in the European timezone will be on Germany’s IFO survey for September. Elsewhere we’ll also get French confidence indicators out this morning as well as German consumer confidence. It’s a busy day for US data this afternoon. As mentioned the highlights are durable and capital goods orders and new home sales. On top of this, initial jobless claims, the Chicago Fed national activity index and the Kansas City Fed manufacturing activity index are also due. The aforementioned speech from Fed Chair Yellen this evening will also be a closely watched affair.