Hindustan Zinc, Vedanta, Nalco and other metal stocks slide up to 5%. Here's why

Hindustan Zinc, Vedanta, and other metal stocks witnessed a significant slump on Monday, plunging up to 5% amid a broader sell-off in the sector. The Nifty Metal index even dipped more than 2%, emerging as the worst-performing sectoral index. Hindustan Zinc led the decline, shedding nearly 5% of its share value, followed by Vedanta and Nalco, which each fell by around 4%.

The sharp drop in metal stocks can be attributed to a decline in metal prices triggered by remarks from US Federal Reserve Chair Kevin Warsh. Warsh's speech indicated the likelihood of further interest rate hikes, potentially as late as September. This led to a 57% probability of a rate hike at the Fed's next meeting, a marked increase from 36% before his comments.

Aluminium, copper, and other metals suffered as the prospect of higher-for-longer US interest rates took precedence over supply concerns, which had earlier bolstered a monthly rise in August. This sudden drop in metal stocks might also be attributed to profit-taking, with the Nifty Metal index surging over 6% in August, outperforming major sectoral indices due to supply worries.

In a recent note, Jefferies highlighted that recent metal price divergence could have positive earnings implications for Hindustan Zinc, while negatively impacting Hindalco. Spot zinc prices rose 15% over Q1 averages, while silver recovered 23% from July lows. Despite this, Jefferies raised silver price assumptions to $60-63, still below spot prices, suggesting potential upside in earnings if spot prices persist.