<p>HONG KONG - Investors prepared for a stock-market retreat and made arrangements to work outside the financial district amid the biggest police crackdown on protesters since the city returned to Chinese rule.</p>
Protesters on Sunday blocked roads including access to the main financial district and refused to disperse overnight.
The benchmark Hang Seng Index will probably open "sharply" lower, according to Kingston Financial Group Ltd. Hong Kong's currency will face selling pressure and funding costs may rise, Brilliant & Bright Investment Consultancy Ltd. predicted. BNP Paribas Investment Partners will shift staff to a site in Kowloon, a 15-minute ferry ride north across the harbor from Hong Kong island.
Police clad in riot gear used tear gas and pepper spray to scatter protesters after they surrounded government buildings and blocked traffic on main roads in and around the Central business district, home to the world's fifth-largest stock market. Thousands of demonstrators remained at 6.30 a.m., with highways and streets still obstructed by makeshift barriers. The showdown adds to concerns about falling retail sales and rising U.S. interest rates that have fueled a 6.5 percent drop in the Hang Seng index from this year's high on Sept. 3.
"Sentiment will be bad," said Arthur Kwong, the Hong Kong-based head of Asia Pacific equities at BNP Paribas Investment Partners, which manages about $650 billion. "Unfortunately, the macro fundamentals are weak already."
Hong Kong Exchanges & Clearing Ltd. said the securities and derivatives markets will continue to operate as normal, according to an e-mailed statement today.
Retailers, Banks
Retailers and tourism-related companies may be among the most affected on speculation protests will deter mainland tourists from visiting Hong Kong during National Day holidays that begin on Oct. 1, said Gavin Parry, managing director of Hong Kong-based brokerage Parry International Trading Ltd. Financial shares in the $3.7 trillion market may also come under pressure, said Ronald Wan, the chief China adviser at Asian Capital Holdings Ltd. in Hong Kong.
Financial firms such as HSBC Holdings Plc, whose Hong Kong headquarters is located in Central, comprise about 56 percent of the Hang Seng Index while consumer-related stocks have a 7 percent weighting, according to data compiled by Bloomberg.
"Occupy Central is definitely a catalyst for a further correction," Dickie Wong, the executive director of research at Kingston Financial Group in Hong Kong. The Hang Seng index may fall to about 23,000, or 2.9 percent below its last close, in the "short term," Wong said.
Election Promise
Pro-democracy demonstrators say China is reneging on its promise to maintain the city's independence under its "one country, two systems" pledge agreed when British colonial rule ended in 1997. The showdown was spurred by the Chinese government's decision last month that candidates for the 2017 election of the city's leader be vetted by a committee, a system designed to produce a new leader effectively handpicked by the government in Beijing.
The protests may weigh on an economy that's already grappling with tepid consumer spending and the prospect of higher borrowing costs. Retailers in Hong Kong recorded year- over-year sales declines for six straight months through July as a crackdown on lavish spending by government officials in China eroded demand. Economists predict August figures due today will show a 2 percent drop.
Hong Kong's interest rates are tied to U.S. Federal Reserve policy because the city's central bank maintains a currency peg, keeping the Hong Kong dollar within a band of 7.75 and 7.85 per U.S. dollar.
Volatility Outlook
Federal Reserve Chair Janet Yellen cautioned this month that the U.S. central bank's commitment to keep interest rates near zero for a "considerable time" could change if America's economic performance continues to exceed expectations.
The Hong Kong currency weakened 0.08 percent last week, the most since March, to 7.7576.
In the options market, traders have shown little concern about a sell-off in stocks amid expectations that a government plan to link Hong Kong's bourse with Shanghai will drive gains. Wealthy mainland investors will get access to Hong Kong shares through the link, which is scheduled to start next month.
The HSI Volatility Index, the city's benchmark gauge of options prices, closed at 15.37 last week, versus a three-year average of 18.99.
New Protests
"The markets were not counting on anything extreme to happen," said Govert Heijboer, the Hong Kong-based chief investment officer of Asia-focused volatility hedge fund manager True Partner Advisor Ltd. "Whether it immediately moves or not, implied volatilities will rise in Hong Kong given this additional uncertainty."
New protests sprung up overnight in the Causeway Bay and Mongkok shopping districts, where hundreds of people obstructed traffic. Hong Kong Chief Executive Leung Chun-ying urged protesters to disperse for the stability of the city, dismissing rumors that police had opened fire or that the government planned to call in the People's Liberation Army.
The protests may deter mainland investors from buying Hong Kong shares when the exchange link starts, said Daniel Chan, a Hong Kong-based analyst at Brilliant & Bright Investment. Seventy-seven percent of mainland investors surveyed by CLSA Ltd. last month said they won't participate.
Contingency Plans
Kingston Financial Group may move staff from its office in Central to Causeway Bay, toward the eastern side of Hong Kong island. Asian Capital's Wan said he may work from home. Singapore-based DBS Group Holdings Ltd. said it won't open branches this morning in Admiralty, where protests have taken place, until the situation improves.
The Transport Department advised motorists not to drive to Hong Kong island today and closed more than a dozen roads, disrupting bus services. Schools will be shut in two districts on the island, the government said.
"This will have a negative impact on the city's markets by renewing the world's awareness about Hong Kong's political risks," said Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc. "This will make it hard for people to buy in a market that's lacking positive news to begin with."