Morgan Stanley's top commodity picks and five miners to watch

Commodity markets are caught between the near-term optimism around China's reopening and what Morgan Stanley describes as an 'inevitable slowdown and calibration of recession risk'.

"For the commodities Australia is most levered to (Iron Ore, Oil, Copper, Aluminium and Gold), the risk reward still looks generally favorable based," said the investment bank said in a note on Sunday.

"... with our economists calling for rates to peak in early 2023, further weakness in the US dollar and a continued move towards a China reopening, macro tailwinds for commodities could be lining up."

Top commodity picks

Iron ore was at the top of Morgan Stanley's order of preference, with expectations of a "temporary 1H rally driven by a seasonal pick-up in steel production against weaker supply."

Its worth noting Singapore iron ore futures have rallied 46% since November.

Iron ore (Orange) versus BHP (Blue), Fortescue (Green) and Rio Tinto (Orange)

Aluminium was viewed as another top pick following another deficit year as "rebounding energy prices drive supply struggles while China demand recovers."

Aluminium is trying to work its way back up to a four month high, up around 15% from September lows but still -13% year-to-date.

Aluminium spot price (Source: TradingView)

"Gold and silver could still see downside initially as the last of the rate hikes come through, but the team see more upside into 2H."

Gold has enjoyed a 10% rally from its November lows, benefitting from Powell's comments that "time for moderating the pace of rate increases may come as soon as the December meeting."

Gold spot price (Source: TradingView)

"They remain cautious copper, calling for prices to trough in mid-2023 as mine and supply grows, tipping the market into surplus," the analysts said.

Top five picks

Source: Morgan Stanley | Table: Market Index