Q.Dear Josh, is the Christmas rally a myth?

A.Historically at least, a Christmas rally is by no means a myth. The last 10 years have seen the FTSE 100 rally nine times in the month of December, with an average rally of 3 per cent. The only year where the index actually fell was in 2002, when it suffered a drop of 5.5 per cent.

There can be several reasons as to why equities have proved bullish over the Christmas period. Of course, the most obvious one could be that all traders are in a festive mood and this can continue into the workplace and affect one’s attitude towards the stock market. Bonus season also begins and some traders could ultimately be looking to invest part of their bonus into the stock market, which increases demand. A final reason could be that traders are anticipating fund managers re-entering the markets in the New Year to set up their portfolios. This could also induce a market rally.

Q.Dear Josh, why does the Irish bailout affect the FTSE?

A.In truth, the FTSE 100 has been one index in Europe that has been least affected by the effects of the Irish bailout. Since the bailout was confirmed, the FTSE 100 has fallen around 3 per cent, while the Spanish Ibex has fallen 8 per cent.

Much of the downward pressure on the FTSE 100 has been related to potential exposures to Irish debt by UK-listed banks. In the same period, the UK banking sector has fallen 5.5 per cent, underperforming the FTSE 100 index and hitting a new four-month low in the process.

But with a majority of companies listed on the FTSE 100 relying on growth beyond both the UK and Irish shores, the negative effect has not been felt as hard here as in other financial territories. For example, the Spanish Ibex has suffered much more than the rest of Europe because investors are concerned that Spain will also struggle to meet its debt obligations.

The sovereign debt situation has had severe consequences for the strength of the euro, which fell as much as 7.5 per cent against the dollar in a little over three weeks, trading below $1.32 last week. The fear is that the current €440bn European Financial Stability Facility, along with contributions from the IMF and EU, may come up short in propping up debt-laden Eurozone states. If problems continue to domino throughout the rest of the so-called PIGS nations (Portugal, Ireland, Greece, Spain) then this fund may well require additional capital injections.

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