Sterling should be the main focus

Outlook:

Assuming no surprises from the ECB or any of the big economies, the dominant factor in the market landscape is the Fed hike on December 8. We can expect some interesting phone calls between Washington and Frankfurt—the Fed's December meeting is ten days later.

Yesterday NY Fed Dudley, the guy who knows the most about market functioning, said "If the economy stays on its current trajectory I think ... we'll see an interest rate hike later this year." It's "not really that big a deal" considering the economy is "reasonably close" to the Fed's employment and inflation goals. "We have made quite good progress toward our objectives ... so clearly as we get closer to our objec-tives it's likely that we'd want to make monetary policy somewhat less accommodative." But note that it's not urgent.

Dudley is the third topmost Fed after Yellen and Fischer. Last year he was clearly worried about liquidi-ty issues on tapering and thus cautious, if not outright dovish. Now everything is hunky-dory, apparent-ly. When it comes to managing expectations, he is steering the market away from panic and tantrums. Mr. Draghi has a harder job managing expectations, especially with the Bundesbank breathing down his neck and questions about eligibility still to be settled. Draghi starts speaking just as we put out this Briefing so we can't report what he says (oh, good, Draghi on Bloomberg TV with breakfast). The euro falling back down to the July low indicates some traders fear a hint of extending QE, but watch that "buy on the news" effect. If and when Draghi gives no hints at all, buyers can easily emerge.

We continue to think sterling is or should be the main focus. The pound is now fading downward, albeit with hardly any momentum, after a countermove to the upside from 1.2088 on Oct 11 to 1.2333 yester-day. This tepid rise was probably mostly technical--perception it had been oversold. There was no rea-son for an upside correction, with everyone and his brother expressing worries about a hard Brexit and data not that hot, if not too awful, either.

There is a shoe waiting to be dropped. Nobody knows what it is. It could be a snotty comment from EU officials about no favors to Britain on trade (and never mind if this is cutting off your nose to spite your face). It could be a big bank announcing departure plans and fear it would set off a stampede. If so, where will they go? Not Paris, however much Hollande boasts and begs. We've been to The City—these guys do not speak French and are not about to learn. That pretty much leaves Amsterdam. Whatever the trigger, no one doubts there is a trigger and that the most likely direction is down.

Political Tidbit: The last presidential debate was agonizing to watch. Sure enough, after a first half hour of articulating real positions, Trump lost his cool. He was visibly angry. He pouted. He inter-rupted. By the time the moderator got to Mosul, Trump was incoherent. What really disqualified Trump, though, was refusing to say he would accept the outcome of the election if he loses the election.

The stunned moderator gave him a second chance but Trump declined to change his answer. The post-debate analysis came down hard on it as a clear and present danger to American democracy. The pun-dits got it right—it became the top headline in every newspaper, including foreign ones like the FT and Guardian.

We liked Clinton's charge that Trump encourages a hostile foreign power to spy on American citizens and calling out the hypocrisy of using Chinese steel in a Las Vegas hotel and illegal alien workers on Trump Tower (and then stiffing them for wages). For his part, Trump called Clinton "a nasty woman." So far the few polls we have do not show any change in voter attitudes. The WSJ reports the same number see Trump positively (29%) as in January, and Clinton gets the same 40%. Trump has never gotten a favorability rating above 29%, meaning he is not attracting new voters to add to his core. A small number (33%) can live with Trump and 43% would be satisfied if Clinton wins, also the same as in Jan. Clinton gets 51% of the vote and Trump, 41%--again, the same as Jan. Best of all—Bloomberg reports that among Republicans, more would choose Pence as the face of the party than would choose Trump. We hope this is a rejection of style as well as content.

If we like the Mexican peso as a proxy for sentiment toward the idea of a Trump presidency. it shows he is losing. The dollar/peso, which started out at the August low at 17.9022, rose to 19.9300 on Sept 26, the date of the first debate. But it started falling the very next day and has straight-lined to 18.4544 so far today.