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Global stocks fell sharply on Monday after protests in China against the government’s strict Covid-19 policies prompted investor worry over the outlook for the world’s second-largest economy.

Wall Street’s benchmark S&P 500 index closed 1.5 per cent lower, while the tech-heavy Nasdaq Composite lost 1.6 per cent. The losses were the largest since November 9, the first session after the US midterm elections, and cut into strong gains for equities this month.

In Hong Kong, the Hang Seng China Enterprises index dropped as much as 4.5 per cent before pulling back to shed 1.6 per cent. The decline on China’s CSI 300 index of Shanghai- and Shenzhen-listed shares was as big as 2.8 per cent before it was trimmed to just over 1 per cent.

Demonstrations broke out in Beijing, Shanghai and other cities over the weekend against government-induced pandemic restrictions. Discontent has intensified since a fire in the city of Urumqi killed 10 people last week, leading to vigils across China as authorities denied allegations that coronavirus restrictions had hampered rescue efforts and prevented residents from escaping the blaze.

The US dollar index traded 0.7 per cent higher against a basket of six international peers, benefiting in part from the “flare-up in China risks”, said Lee Hardman, a currency analyst at MUFG.

Growing unrest in China has hit investors with a “reality check”, said Emmanuel Cau, head of European equity strategy at Barclays.

“China reopening hope was part of the bullish end-of-year narrative,” Cau added. “Investors now realise that whatever the direction of travel is on zero-Covid, it won’t be a smooth process.”