Another Shot Across Asia's Bow

The SSE 180 -- an index comprising Shanghai's top 180 companies -- has most surprised investors this week, climbing above the pivotal 6000 mark, where it dropped off on Feb. 27. The index ended the day down 1.72% to 5922.07. The 6000 benchmark is seen as less important, however, than the 3000 level for the Shanghai composite index.

In Hong Kong, investors were speculating over the potential effects of the debacle surrounding subprime mortgages in the U.S. and revisiting the importance of the yen carry trade -- the borrowing of yen to finance investment in higher-yielding assets elsewhere. The broadest consensus is that the subprime mortgage deterioration, despite constituting less than 10% of America's mortgages, will prompt banks to tighten credit standards. That could undermine U.S. consumer spending and prove a drag on Asian exports.

Chisato Haganuma, a senior Japan strategist for Nomura Bank in Hong Kong, says Asian exports -- a crucial source of income to the region -- will "soften considerably" and that the second-quarter outlook for the region is "gloomy".

Just as appetites for risk were starting to normalize again, fears that the U.S. subprime dilemma may have a further destabilizing impact on exports are prompting renewed concerns about an unwinding of the carry trade.

Weakening exports could potentially prompt a further unwinding of the carry trade, which could send shares spiraling even more, depending on how quickly and to what extent the subprime mortgage situation is resolved. (Friday's news that Accredited Home Lenders (LEND Quote - Cramer on LEND - Stock Picks) agreed to sell $2.7 billion of loans to an unnamed buyer was taken as another sign that the situation can be resolved without major financial upheaval.)

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