Is the stock market upswing here to stay?

After three sessions of closing below 7,000, early trends in the FTSE 100 index look positive today. It has traded between 7,000 and 7,035 so far. And I do not think this is any coincidence either. 

Evergrande gives hope

The latest stock market jitters originated in Asia. China’s second biggest property developer, Evergrande, revealed on Monday that it is unable to make interest rate payments right now. This triggered speculation of its likely collapse, and the potential contagion the highly indebted firm may spark. Its shares fell fast on the Hong Kong Stock Exchange, where it is listed. 

However, it has now said that it has made a deal with bondholders, which should allow it to make interest payments. Hong Kong’s Hang Seng index closed slightly higher today as well, and the improved sentiment has likely spilled over into global markets. 

China-sensitive FTSE 100 stocks rise

This is evident in the biggest FTSE 100 gainers today, which include the banking corporation HSBC, for which Asia is the single most important market. It also includes multi-metal miners like Anglo American, BHP and Glencore. China’s stimulus since last year has been a big reason for the industrial metals’ rally. And any bad news from the economy triggers nervousness about these stocks too. 

UK coronavirus numbers decline

UK-specific news is positive too. Coronavirus numbers continue to improve. In the past week, both the number of people testing positive and patients admitted to hospitals have declined. While the death figures are still rising, hopefully these should slow too. This should give a fillip to long suffering travel stocks. In the past week alone, share price of British Airways owner International Consolidated Airlines Group (IAG) has increased some 25%!

Positive news flow

News flow on FTSE 100 stocks has also been largely positive, which should keep the FTSE 100 index buoyant. Home improvement company Kingfisher reported robust results yesterday. And Royal Dutch Shell shares rose on its rapid moves towards greater carbon neutrality. Safety equipment maker Halma now expects bigger profits this year. 

What can go wrong

However, there are still a number of developments that can keep the FTSE 100 index muted. The index has run up a lot in the past year, much of it in anticipation of better times. But we are still in an uncertain place because of the virus. Cyclical shares, like banks and commodity stocks, which are a big part of the FTSE 100, could plunge if there are any prolonged threats of its re-emergence. 

Also, the economy has improved since the lockdowns, but risks are rising too. The most persistent of these is inflation, which rose to 3% year-on-year in August. While it is widely believe to be a transient phenomenon, I do not think that investors take this for granted. It looks like an especially challenging situation when combined with slowing growth, as seen in July’s numbers, and rising taxes. All of these put together can impact the recovery and also the performance of the FTSE 100 index. 

My takeaway

That said, I am more positive on the stock markets than not on balance. I continue to be a buyer of FTSE 100 stocks.