Monitoring the New Asian Contagion

While a new round of "Asian contagion" became a reality today as regional markets plummeted, the only question on traders' minds was the extent of the damage.

"The worse the U.S. credit problems look, the more this situation looks like the last chapter of the mid-1990s excesses," says Adrian Foster, head of capital markets for Dresdner Kleinwort in Beijing. "U.S. organizations are selling toxic waste into international accounts."

Foster points out that back in the 1990s, it was bubbles in risky emerging markets assets and U.S. technology shares that caused giant crashes in world markets, whereas now it is the "safe havens" of currencies and precious metals.

Asian ETFs, such as MCSI's Japan Index(EWJ Quote), Hong Kong Index (EWH Quote), Malaysia Index(EWM Quote), and Singapore Index(EWS Quote), have shown more resilience than most to the recent downturn as Asia has fallen only steadily. But Asia market commentators point out that in the short term, these ETFs may now be hit hardest of all.

Ben Simpfendorfer, economist and chief currency strategist for RBS in Hong Kong, says that the economic outlook for the region is more uncertain than ever as the yen rallies against the dollar and other emerging-market currencies.

"It's always been a bit of a guess what would happen once the yen started to unwind," says Simpfendorfer.

The yen carry trade, where speculators take on cheap Japanese debt and invest in higher-yielding assets elsewhere, has slowly been unwinding against the dollar, the kiwi and the rand in last few weeks, although has yet to unwind to 114 vs. the dollar, as many previously predicted.