Hong Kong stocks fell the most since late August as protests escalated after police shot and wounded a protester on Monday morning.

The Hang Seng Index dropped as much as 2.5 per cent, with local landlords plummeting. Police fired tear gas in center of the business district to disperse chanting office workers who were blocking roads. Signs that optimism over a potential US-China trade deal has been overdone added to the bearish sentiment. The MSCI Hong Kong Index slumped 3.1 per cent and the local dollar weakened.

The abrupt drop in the city’s stocks -- by far the worst in Asia -- follows a half trillion dollar rally that drove a measure of buying momentum to its highest level in almost nine months and pushed the Hang Seng Index above its 200-day moving average.

The shooting came as protesters called for a city-wide strike following the death of a student who fell from a parking garage amid a police dispersal operation. The city’s railway operator suspended parts of some lines amid mass vandalism and universities cancelled classes. Police had earlier said two protesters were shot.

Read more: Hong Kong police officer shoots protester as violence flares

Hong Kong safety is now a big question, said Jackson Wong, asset management director at Amber Hill Capital. Some people are worried that today’s event would escalate the protest. There’s also conflicting messages from the US and China over the trade deal. Last week people were pricing in a successful deal.

The local dollar slid 0.05 per cent to 7.82337 per greenback after its best week since mid-September. That’s even as a gauge tracking the demand for cash jumped to the highest level since early 2016. The currency’s three-month forward points surged to as high as 46.83, surpassing the intra-day peak of 46.09 seen in mid-August.

Concern is also rising that Hong Kong’s bleak economic situation has yet to fully filter through to its stocks. Faced with its worst business outlook since the 2008 financial crisis and a plunge into recession, a chill may be coming for Hong Kong’s corporate earnings. He Qi, a fund manager with Huatai Pinebridge Fund Management Co. who called the rally in mid-August, says he’s preparing to sell.

Hong Kong’s gains are just part of a global risk-on rally amid a flood of liquidity, and the short-term gains are way too strong, said He.

While President Donald Trump said late last week that trade talks with China were moving along very nicely, he added that reports about how much the US was ready to roll back tariffs on China were incorrect. Those reports had helped fuel the risk-on rally that sent a gauge of global stocks to its highest level since early 2018.

Chinas largest brokerage Citic Securities Co. earlier this month trimmed its earnings growth forecast on the Hang Seng gauge to 4 per cent this year from a previous estimate of as much as 8 per cent. The continuing protests in the city and the impact on commercial property, retail and tourism industries has gone beyond expectations, strategists led by Yang Lingxiu wrote in a note dated November 4.

Swire Pacific Ltd. plunged 5.4 per cent at 2:08 pm local time. Wharf Real Estate Investment Co. sank 5.3 per cent and New World Development Co. lost 4.5 per cent.

City workers and tourists ran into shopping malls and office lobbies after riot police fired rounds of tear gas in the heart of the Central business district, just blocks from the stock exchange. The city’s stock market will remain open as usual, Hong Kong Exchanges & Clearing Ltd. spokesman Jeffrey Ng said in a email.

To be sure, traders can still find opportunities in a market where many firms rely on the mainland for earnings. Chinas A shares are about 27 per cent more expensive than their Hong Kong listed peers, compared with a long-term average of 20 per cent.

The recession will likely make its presence felt in earnings for this year and in the first quarter of 2020, said Ken Chen, a Shanghai-based strategist with KGI Securities Co. There’s no end in sight to the local unrest and expectations of an economic recovery next year remain low, he said. Hong Kong is just rising along with global markets, and the gains will pause when the global rally weakens.