UK Market Update. Key Takeaways. Markets. 31 May, FTSE ends May with biggest gain in Europe

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1 UK Market Update FTSE ends May with biggest gain in Europe Britain's FTSE 100 ended May as the month's best-performing major European index, shrugging off worries over a political crisis in Italy as commodities-related stocks rallied. The top share index ventured into new unchartered highs in the month, posting a first consecutive two-month gain in UK stocks were caught up in the last week of the month in a broader market sell-off as a political crisis deepened in Italy, which has had trouble forming a government since inconclusive elections in March. The impact on the FTSE has however been limited. The index ended May up 2.3 percent, while euro zone stocks fell 2.5 percent over the course of the month. "A lot of it is due to the fact that (the FTSE)... is detached from Europe in many ways. Essentially, it's about the make-up of what the bulk of those large caps on the FTSE do," Ken Odeluga, market analyst at City Index, said. Odeluga pointed to the FTSE's large weighting in energy stocks, which have benefited from a higher oil price, and in miners. More broadly, investor sentiment on British stocks has become more optimistic in recent weeks. Investor confidence in UK assets has grown over the past quarter, with the number of investors looking to decrease their holdings falling to a record low of just 14 percent, State Street's "Brexometer 3 " survey showed. Correlation between FTSE 100 and the pound Key Takeaways 31 May, 2018 FTSE leads European stocks Despite Italian political turmoil FTSE ended the month in the green Pound erases yearly gains Reduced BoE rate hike expectations due to economic weakness pushes pound lower Italian Political Turmoil Investors dump Italian bonds and rush to safe haven gilts 2 Markets Equities Index Last Monthly Chg FTSE STOXX DAX CAC Dow Nasdaq Composite S&P Currencies UK U.S. Euro Yen GBP USD EUR YEN Benchmark Bonds 10 Latest Yield Spread vs. Bund Spread vs. T-notes UK US Germany France Italy

2 Pound wipes 2018 gains The British pound, one of the best-performing currencies in 2018, erased all its gains for the year after another surprise fall in inflation and signs of sustained weakness in the economy dented the prospect of the BoE raising interest rates this year. The pound was also pressured by the dollar's rally, the Italian political crisis and the looming U.S. trade tariffs. The BoE held rates steady as expected and cut its growth and inflation projections for this year pushing the pound to $1.32, its lowest level since November. Against the euro, the pound closed at pence. The two currencies have traded in a narrow band in recent weeks as both have come under selling pressure. Italy s political turmoil affects UK bonds Yields on 10-year and longer-dated British government bonds tumbled in the last week of the month to their lowest level since September 2017, as Italy's political crisis drove investors to seek safe-havens. On May 29th, the 10-year gilt yield fell as low as percent, its lowest since Sept. 12, Yields on 20- and 30-year bonds fell as low as and percent, their lowest levels since August and September respectively. The benchmark bond yield ended the month at percent. Looking Ahead DATA TO WATCH A flurry of economic data, including forward-looking PMIs 11, housing prices, retail sales 12, inflation 13 figures and gross domestic product, are scheduled for next month and give best health checks of the Britain s economy. Investors will also look for an update on any change in interest rate policy from the BoE. VIGILANT FED 14 The upcoming U.S. employment report will help the Fed to decide its next stance on interest policy, assuming global risk aversion over Italy and trade tensions remain low. Investors will be looking for a rate decision at the next Fed meeting on June UK and Italy bond yields reaction to safe-haven demand OPEC TO DECIDE OIL SUPPLY Ahead of a key Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna on June 22-23, Saudi Arabia and Russia have been in talks to raise oil production by 1 million barrels per day (bpd).

3 Italy's bond market bounces back, gets thumbs-up from big Japanese investor Italy's borrowing costs fell sharply at month-end after touching historical highs during the month, following news that one of Japan's largest institutional investors is looking to buy shortdated Italian debt helped stabilise a market battered by the political crisis in Rome. Japan Post Insurance Co's chief investment officer told Reuters that the firm, also known as Kampo, is looking to buy short-term Italian government bonds after the recent sell-off made them inexpensive. With over $700 billion of assets, Kampo is one of Japan s biggest investors. On May 29th, Italy's 2-year bond yields had posted their biggest one-day jump in 26 years on fears that fresh elections in the euro zone's third biggest economy could strengthen the hand of antiestablishment parties. Italy's 2-year bond yield closed the month at 1.04 percent, down from the 5-year high of 2.7 percent it touched earlier in the week. Euro zone bond markets in May UK Diary June 1 - BoE s Andy Haldane gives lecture in Glasgow. June 4 - BoE s Silvana Tenreyro speaks in Guildford. June 6 - BoE s Ian McCafferty takes part in a question-andanswer session with listeners of LBC radio in London. June 6 - Theresa May hosts her Norwegian counterpart Erba Solberg for talks in London. June 7 - BoE s Dave Ramsden speaks in London. June 21 - BoE announces rate decision and publishes the minutes of the meeting. June 27 - BoE releases Financial Stability Report for June 2018.

4 Glossary 1 FTSE A blue chip share index of 100 companies listed on the London Stock Exchange 2 Gilts - Bonds issued by the British government 3 Brexometer - A quarterly snapshot that gauges investor sentiment on the impact of Brexit 4 STOXX A share index that represents big, mid and small cap companies across 17 European markets 5 DAX - A blue chip share market index, consisting of 30 major German companies listed on the Frankfurt Stock Exchange 6 CAC 40 - A benchmark French stock market index, tracking the 40 largest stocks listed on Euronext Paris exchange 7 Dow 30 - A price-weighted average of 30 significant stocks trading on the New York Stock Exchange (NYSE) and NASDAQ 8 Nasdaq Composite - A share market index of the common stocks and similar securities listed on the NASDAQ stock market 9 S&P A major stock market index based on the market capitalisations of 500 large U.S. companies 10 Benchmark Bond - A key government bond that is used to gauge overall performance in a particular debt market 11 PMI - Purchasing Manufacturing Index, a set of economic indicator about the strength of the manufacturing sector 12 Retail Sales - An aggregated measure of the sales of retail goods over a stated period 13 Inflation - A sustained increase in the general level of prices for goods and services in a country 14 Fed - Federal Reserve, the U.S. central bank

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