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Sterling is set for some major volatility next week as U.K. lawmakers vote on the country’s planned departure from the European Union.

The British Pound could jump as much as 4 percent against all the other major currencies on Tuesday, according to a strategist at J.P. Morgan Asset Management said. The caveat for this upside is the unlikely approval of the Prime Minister Theresa May’s Withdrawal Agreement — the much-maligned 585-page document that outlines how the U.K. should leave the Union.

“The pound is down about 4 percent from that level (when the prime minister came back from Brussels with an agreement) so we will at least recover that on the deal passing,” Karen Ward, a chief market strategist at J.P. Morgan Asset Management, said Wednesday at an event in London.

But sterling could also lose more than 2 percent against the U.S. dollar if the deal is rejected, according to strategists at Nomura.

The British pound has seen some serious weakness since the country voted to leave the European Union in June of 2016. It initially dropped to a 31-year low immediately after the vote and throughout last year the currency lost 6 percent of its value against the greenback. On Friday morning it was trading at around $1.2727.

Jane Foley, the head of foreign exchange strategy at Rabobank, told CNBC via email that if the vote passed next week she would expect sterling-dollar to trade back in the 1.30 area. “On a failure I would expect to see 1.25,” she said.

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The trade war is taking a big bite out of profits for Wall Street’s biggest names

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Workers load goods for export onto a crane at a port in Lianyungang, Jiangsu province, China June 7, 2019.

Reuters

The trade war and global slowdown are combining to trigger a sharp drawdown in profits for U.S. multinational companies.

Companies that derive more than half their sales outside the U.S. are expected to see a 9.3% slump in second-quarter earnings as the reporting season looms about a month away, according to FactSet estimates that see the S&P 500 broadly reporting a 2.3% decline.

That means big companies like Apple and Boeing that have far-flung operations and count on business and lower costs from other countries as a big ingredient in their recipe for success. Of the S&P 500’s 11 sectors, information technology is expected to see the biggest dropoff in earnings at 11.8%.

A number of multinationals have seen huge downward revisions to their second-quarter earnings outlooks, including Take-Two Interactive Software, Noble Energy and V.F. Corp.

In contrast, companies that see half their business come from inside the U.S., earnings are expected to grow 1.4% as they are not subject to the rising costs of imported goods and seeing their wares subjected to duties in foreign markets.

On the revenue side, companies with an international bias are expected to see a decline of 1.2% while domestic-facing companies are projected to see a sales gain of 6%.

The biggest gainers in earnings for Q2 are expected to be energy (3%), utilities (2.3%) and health care (2%), while losers, in addition to tech, are materials (-7.2%), staples (-2.8%) and discretionary (-2.5%). Winners on the revenue side are projected to be communication services (14.1%), health care (12%) and discretionary (3.8%), while the worst-performing sectors will be materials (-9.3%), tech (-0.9%) and industrials (1.2%), according to FactSet estimates.

The market doesn’t care, so far

“Tariffs are part of the story,” said David Lefkowitz, senior equity strategist for the Americas at UBS Global Wealth Management. “But I also think there are a number of other factors that are driving some pockets of weakness in the global economy and the earnings picture for the U.S. economy.”

Thus far, the U.S. has been largely shielded from any dramatic effects from either the tariffs or weakness in other developed economies. Domestic GDP rose 2.9% in 2018 and 3.1% in the first quarter of 2019, inflation has been subdued and the jobs market has held up, though it has been showing weakness lately.

The stock market has been volatile but has largely shrugged off the tariff issue as major indexes are all up double-figures year to date and have gained nearly 5% apiece in June.

However, more company executives, in sentiment surveys and elsewhere, have been expressing unease and warning that rising costs will begin to eat into profitability.

Wall Street analysts have taken note and are anticipating some more tangible impact to begin showing up.

“Policy uncertainty is high, especially on trade,” John Lynch, chief investment strategist at LPL Financial, said in a recent note. “We have reduced earnings estimates to acknowledge the increased risk of a prolonged trade conflict. We remain optimistic that these trade disputes can be resolved this summer, though probably not until more economic pain is inflicted on the U.S. and China economies.”

Investors have taken caution as well.

After yanking a record $19.9 billion out of stock-focused exchange-traded funds during the tumultuous May slide, flows have come back somewhat, but investors are still looking for safety. So far in June, fixed income ETFs have taken in $15.1 billion, just $2 billion shy of the record, according to State Street Global Advisors. For the year to date, bond ETFs have seen $63.9 billion of inflows, compared to just $28.4 billion for equity funds.

“You still have China, and it remains an unforecastable dynamic given our current administration’s proclivity for randomness,” said Matthew Bartolini, State Street’s head of SPDR Americas research. “Investors are letting bonds be bonds and mitigating episodic risk.”

Apple, Boeing, Intel see impact

That move comes at a time when some of the market’s biggest names could see noticeable downward moves in earnings.

Apple, which saw 57.9% of its business come from abroad in 2017, the most recent year for which full data was available, is expected to see a 14.6% quarterly drop in earnings and a 10.3% decline from the same period a year ago, according to data from FactSet and S&P Dow Jones Indices.

Boeing, which derives 54.7% of its sales internationally and also has experienced serious issues with its 737 Max, is looking at a 43.7% quarterly earnings drop and a 45.6% decline from a year ago. And chipmaker Intel, which gets a full 80% of its revenue overseas, is projected to be off 14.4% from its profit for the same period in 2018.

It’s not just earnings — individual company stock prices have fallen as well.

Bartolini screened for stocks with a majority of foreign sales vs. those with more domestic-facing businesses and found that as of Tuesday the former group is down about 2.5% since May 1 while the latter is off just 0.48%.

“We have investors moderately moving back into risk. It will be interesting to see if this continues, particularly as earnings season begins,” he said.

Retail risk

Another area that bears watching is retail. The sector is susceptible to tariff risks due to input costs, and the inability to pass the costs on to customers in a noninflationary environment.

“We think most brands lack the pricing power to offset cost increases and see risk to specialty retailers if no trade deal is reached and apparel is tariffed,” Lorraine Hutchinson, research analyst at Bank of America Merrill Lynch, said in a research note.

Some of the companies at greatest risk, according to Hutchinson, are Chico’s, American Eagle Outfitters and Abercrombie & Fitch.

“We think retailers will have difficulty raising prices even by the 2% needed to offset a 25% tariff as competition has led to a deflationary apparel CPI for much of the past 20 years,” the analyst said.

A further risk for retail comes from the potential for a slowdown in tourism that would come with escalating tensions between the U.S. and China. Tiffany’s and Tapestry’s would face the biggest downside risks, with respective exposure of 28% and 17%, Hutchinson added.

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OPEC supply cuts, US crude inventories in focus

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Oil pumpjacks in the Permian Basin oil field are getting to work as crude oil prices gain.

Spencer Platt | Getty Images

Oil prices sank on Wednesday after government data showed a large increase in U.S. crude stockpiles for the second week in a row and as the market continues to grapple with concerns about weakening fuel demand.

U.S. commercial crude inventories rose by 2.2 million barrels in the week through June 7, according to the U.S. Energy Information Administration. Analysts in a Reuters poll had expected stockpiles to fall by 481,000 barrels.

Brent crude, the international benchmark for oil prices, was down $1.25, or 2%, at $61.04 around 11:20 a.m. ET (1520 GMT). Brent hit a session low at $60.30 in early morning trading.

U.S. West Texas Intermediate crude futures fell $1.37, or 2.6%, to $51.90 per barrel. WTI fell as low as $51.46 earlier in the session.

Crude futures fell to a nearly five-month low last week after EIA figures showed crude stocks surged to the highest level since July 2017. Brent is now down 19% from its 2019 high in April, while WTI is trading 22% lower over the same period.

Oil prices ended Tuesday’s session roughly flat, supported by expectations that OPEC and its allies will continue to prop up prices by limiting production, but buffeted by concerns that the U.S.-China trade war will weigh on global economic growth and fuel demand.

President Donald Trump on Tuesday said he is holding up negotiations until Beijing agrees to return to the terms of negotiations laid out earlier in trade talks.

“It is constant concern about the demand outlook because of what’s happening with the situation with China,” said John Kilduff, founding partner at energy hedge fund Again Capital.

Stocks and other assets have been bolstered by hopes that the U.S. Federal Reserve will cut interest rates and stimulate growth, but energy commodities need more evidence that economic activity will rebound, Kilduff added.

“Oil is reacting to the disease, while other assets are reacting to the cure more,” he said.

EIA on Tuesday cut its forecast for global oil demand growth to roughly 1.2 million barrels per day in 2019, down from last month’s projection of about 1.4 million bpd. OPEC and the International Energy Agency are scheduled to update their demand outlook on Thursday and Friday, respectively.

OPEC and other major producers are set to meet in the coming weeks to discuss their policy of withholding 1.2 million bpd from the market.

Members of the alliance known as OPEC+ have signaled they are prepared to extend the current deal, which started in January and runs through June, into the second half of the year.

Goldman Sachs on Wednesday said it expects OPEC+ to roll over the policy, given the “historically high” uncertainty in the oil market. The investment bank says it believes the group’s core members, including Saudi Arabia and the United Arab Emirates, will take steps to keep the market from tipping into oversupply or undersupply.

“From an effective production perspective, we expect that core-OPEC will continue to balance the market by responding to consumer demand, and if needed produce below or above its targets, as already exhibited during the first five months of the year. This would lead to a balanced market despite the vagaries of demand and Iran/Venezuela/Libya production,” Goldman said in a research note.

Goldman says that outcome will be only “modestly supportive” of oil prices, keeping Brent near $65.50 per barrel in the third quarter. The oil market will come under renewed pressure in the second half of the year as new infrastructure allows a surge of U.S. production to come online, the bank says.

After surging last year, U.S. crude oil output has steadied around 12 million-12.4 million barrels per day, according to preliminary weekly readings.

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Japan’s Abe heads to Iran with oil and the US on the agenda

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Shinzo Abe, Japan’s prime minister, speaks during a meeting with council members of the Keidanren business lobby in Tokyo, Japan, on Wednesday, Dec. 26, 2018.

Tomohiro Ohsumi | Bloomberg | Getty Images

Japanese Prime Minister Shinzo Abe is in Iran for a two-day mission with clear goals: to secure his country’s energy supply, and to bring adversaries Iran and the U.S. to the negotiating table.

Both are challenging feats, and they require Abe — an ally of President Donald Trump and the first Japanese prime minister to visit Iran since its 1979 Islamic Revolution — to walk a thin tightrope between Japan’s economic needs and its maintenance of geopolitical relationships.

Japan imports nearly all of its oil, and most of it from the Middle East, so sanctions on Iranian crude and potential instability in the region threaten its economy. But it also doesn’t want to anger the U.S., its most powerful ally and security partner.

Abe is slated to meet with Iranian Supreme Leader Ayatollah Ali Khamenei and President Hassan Rouhani, and may well attempt to persuade them not to abandon the Iranian nuclear deal, from which the U.S. withdrew in May of last year. Trump gave Abe the green light for his visit, saying last month, “I know for a fact that the prime minister is very close with the leadership of Iran, and we’ll see what happens. That would be fine.”

Henry Rome, an Iran analyst and political risk consultancy Eurasia Group is skeptical of progress.

“While the meetings may help ease tensions in the short term, Abe will likely fail to convince Iranian leaders to negotiate directly or indirectly with Washington,” he said in a research note Monday.

Economically cornered, Iranians still largely remain “firmly opposed” to talks with the Trump administration, Rome added. Trump has openly suggested talks with Iranian leaders, who criticize the U.S. for being insincere and engaging in what they describe as provocative escalation.

“As we have argued over the past year, the main barrier to talks between the US and Iran is Tehran,” Rome said. “Abe has little shot at convincing Iranian leaders to abandon this policy.” Khamenei has vocally urged against negotiating with Washington, stressing in recent speeches that to negotiate would mean “losing absolutely.”

A clean slate: Japan’s track record of diplomacy

Tensions have escalated rapidly between Tehran and Washington after the White House blamed a number of regional attacks in recent weeks on Iran. The U.S. is deploying additional military hardware and troops to the Gulf region while economic sanctions have crippled parts of Iran’s economy, including oil exports.

Trump withdrew from the 2015 Iranian nuclear deal in May of last year and has been tightening sanctions on the country ever since. Now that Iran sees dwindling benefit to the deal that was supposed to give it economic relief in exchange for limits to its nuclear program, it has threatened to return to higher levels of uranium enrichment, sparking acute concern across the international community.

The Nimitz-class aircraft carrier USS Abraham Lincoln transits the Indian Ocean in this U.S. Navy handout photo dated January 18, 2012. The carrier sailed through the Strait of Hormuz and into the Gulf without incident on Sunday, a day after Iran backed away from an earlier threat to take action if an American carrier returned to the strategic waterway.

U.S. Navy | Chief Mass Communication Specialist Eric S. Powell/Handout | Reuters

In addition to pursuing some sort of path to de-escalation, Abe seeks to showcase Japan’s diplomatic influence on the world stage.

In 1983, Abe’s father, then Japan’s Foreign Minister Shintaro Abe, visited Tehran in an attempt to mediate between Iran and Iraq during the two countries’ brutal war, and the younger Abe accompanied him as a secretary. Iran and Japan have a long history of cooperation, even during that war against the U.S.’s wishes — meaning it has something of a clean slate diplomatically.

The ball for negotiations in Iran’s court?

There are obvious economic interests too. Oil makes up 97% of Japan’s imports from Iran, according to the Japanese finance ministry. But Iranian crude made up only 4% of Japan’s total oil imports last year, dwarfed by imports from Saudi Arabia, the United Arab Emirates and Qatar. Market forecasters expect Japan to fully cease its Iran imports as required by U.S. sanctions.

Still, the energy dynamic remains a part of Abe’s outreach. Tokyo’s considerations include “its own energy policy, stability in the region, a diversified source of oil imports,” Waqas Adenwala, an analyst at the Economist Intelligence Unit, told CNBC’s Capital Connection on Wednesday.

“But it also has the short-term goal of having a very successful foreign policy page front.”

By that measure, Adenwala said, Abe hopes to boost support at home ahead of his hosting of the G20 Summit in Osaka at the end of June and parliamentary elections scheduled for late July.

And despite Tehran’s apparent unwillingness to engage with the White House, “Iran does want to lower tensions with the US,” Rome said. “It has little to lose by engaging with Abe.”

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