Here’s how much China stocks still could rally from zero-COVID, say Goldman Sachs strategists

Wall Street stocks are poised for a bounce to start a new week, with politics one spotlight as US midterm elections are set to get under way.

Many expect a split Congress and political deadlock for two years, which isn’t necessarily bad for markets, which tend to prefer a divided government. Neil Wilson, chief strategist at Markets.com, said markets have done better 17 out of 19 times postwar in the half-year after than half-year before.

China is another focus, and Wall Street got a little boost late last week on rumors of a loosening of the country’s COVID-zero policy, though officials denied that was happening over the weekend.

China’s no-tolerance COVID rules have been tough on the country’s markets and Wall Street at times. Markets remain hopeful that Beijing will bend eventually, that’s as we see those COVID policies interfering with Apple’s ability to sell more big dollar phones in time for Christmas (see The Buzz).

Start your engines now for the big China reopening, says our call of the day from Goldman Sachs, which sees the country’s stock markets rising as much as 20% once the big reopening comes. “Cross-country empirical analysis shows that equity markets tend to pre-trade reopening about a month in advance and the positive momentum typically lasts for 2-3 months,” said a team of strategists led by Kinger Lau.

The note was written with the MSCI China index at 54 — so it includes the 11% gain last week.

They see steep economic costs whittling away at the government’s resolve, with fresh data showing a surprise fall in October exports for China.

“Reported cases are rising but more signs of COVID policy relaxation have been made available post the Party Congress, and our economists expect China could start to reopen in 2Q23 on political and public health considerations,” they said.

Like the rest of the world, the Omicron variant has been tough on President Xi Jinping’s government, with cities making up 50% of the country’s economy under some restrictions as of Nov. 4, points out Goldman. They estimate containment moves have knocked China GDP some 4% to 5% from trend levels.

And while US markets are stuck in worries about Fed tightening, China may be eager to keep stimulating to recover from its COVID problems. The Hang Seng HSI,
+2.69%
has lost 29% so far this year, versus a 20% drop for the S&P 500 SPX,
+1.36%.

Goldman is encouraging as well by the planned rollout of CanSino’s inhalable vaccine that boosted China stocks a few days ago, and BioNTech’s BNTX,
+6.24%
Vaccine that has been okayed for foreign residents and could see further rollout.

Goldman is also encouraged by more international flights to China, and some high-profile global events scheduled for the second half of next year onward. If China meets a few conditions, such as higher elderly vaccinations and more access to affordable and effective COVID pills, next spring could be when we see the big exit from zero COVID rules.

Goldman Sachs

As for what to invest in, Goldman sees benefits for more for the offshore market, than A shares, notably hotels, catering and entertainment sectors. Sands China 1928,
+0.83%,
Yum China 9987,
+0.86%

YUMC,
+5.63%,
Trip.com 9961,
-2.96%

TCOM,
+5.58%,
Galaxy Entertainment 27,
+0.71%
and China Tourism Group Duty Free 601888,
-2.94%
are among a few names they like.

The markets

MarketWatch

Stock futures ES00,
+0.43%

YM00,
+0.45%

NQ00,
+0.38%
are higher, with bond yields TY00,
+0.01%

TMUBMUSD02Y,
4.688%
easing off along with the dollar DXY,
-0.30%.
Oil prices CL.1,
-0.40%
are softer, while natural-gas prices NG00,
+8.28%
are sharply higher. In Asia, Hong Kong stocks HSI,
+2.69%
led gains across the broader region.

The buzz

The bulk of earnings news will come after the close of markets, when Take-Two TTWO,
-2.49%,
ActivisionBlizzard ATVI,
+0.08%,
Lyft Lyft,
+0.15%,
TripAdvisor TRIP
+2.37%
and a few others will report.

Apple AAPL,
-0.19%
said it expects lower shipments of its iPhone 14 Pro and iPhone 14 Pro Max devices, as COVID-19 issues hamper China production. Softer demand will also lead to 3 million fewer iPhones produced, Bloomberg reports.

thousands of workers at Facebook parent Meta META,
+2.11%
could be laid off as soon as Wednesday.

CPI inflation and consumer sentiment are in the data spotlight this week. For Monday, we’ll get consumer credit and an appearance by Richmond Fed President Tom Barkin, who will speak on inflation at 6 pm Eastern.

Read: Why a big labor shortage is adding to high inflation in the US

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The chart

Watch out for new highs in the enegy sector, says Larry Tentarelli, editor and publisher of the Blue Chip Daily Trend Report. Specifically, he’s looking at the SPDR S&P Oil & Gas Exploration & Production ETF XOP,
+1.93%
which he notes broke out to a 20-week closing high on Friday.

“(XOP) is trending higher, above weekly moving averages, and could be rising setting up for a test of new highs. This can be a volatile sector, as well as crude oil itself, so near-term consolidation wouldn’t be unexpected. On any major pullbacks, I’d want to see the 125-130 level hold,” Tentarelli told clients on his blog.

Blue Chip Daily Trend Report

The tickers

These were the top-searched tickers on MarketWatch as of 6 am Eastern:

Ticker

Security name

TSLA,
-3.64%

Tesla

GME,
+0.84%

GameStop

NIO,
+17.51%

NIO

AAPL,
-0.19%

Apple

AMC,
-0.88%

AMC Entertainment

META,
+2.11%

Meta Platforms

AMZN,
+1.88%

Amazon.com

MULN,
-6.91%

Mullen Automotive

bbby,
-1.00%

Bed Bath & Beyond

DWAC,
+7.04%

Digital World Acquisition

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