Remaining hopes that Asian equity and bond markets were immune from the spreading disaster in Europe and the US evaporated dramatically Thursday as markets across the region were battered by spooked investors. It was the biggest daily fall across all markets since the attacks on the US on September 11, 2001.

Korea’s Seoul Composite plunged by 6.93 percent, shedding a one-day record of 125.91 points; the Taiwan Weighted Index was down by 4.56 percent and Hong Kong’s Hang Seng Index fell by 3.29 percent. Other markets were suffering similar losses. Japan’s Nikkei, the biggest market in the region, lost nearly 2 percent. And, given the events of the last few days, it is increasingly clear that these events are starting to affect Asian institutions. According to economist Enzio von Pfeil, US$3.6 trillion has been wiped off global stock markets since July 23.

Nor have bonds been any safer haven. Heavy selling has continued as investors have grown increasingly nervous. Some investment trusts said they have had trouble repaying short-term loans as panicky customers continued to withdraw their cash.

Investors across the region bear a marked resemblance to an infantryman in a midnight foxhole, hearing the loud noise of tank engines outside the wire. Like the scared soldier, nobody knows which way to run.

The bad news seems to be rolling in daily, despite continuing statements that global economic performance is sound. It is partly concerns about the US subprime market, where rising delinquencies have pushed up rates on commercial paper to 5.83 percent, partly concerns about the dramatic unwinding of the carry trade in Japan as the yen jumped to five-month highs, which can be expected to hit hedge funds hard. It is also partly concerns about whether US consumers will continue to support exports from Asia – and partly that simply nobody knows how much of the growth of derivative financial instruments is built on a huge Ponzi scheme.

The damage has spread well outside the United States to Europe, and more lately, to Japan, where yesterday Mitsubishi UFJ Financial Group and Sumitomo Mitsui both reported losses on investments related to the US subprime market. Although it represents only about 6 percent of total mortgages in the US, nobody really knows how much of the derivatives market is built on them.

Some fear a hard landing in housing could hurt the rest of the economy by reducing consumer purchasing power.

Sean Darby, strategist for Nomura in Hong Kong, warned, “The ongoing turbulence in global money markets hints at a severe liquidity squeeze and a growing confidence crisis within the banking system. Asian equity investors are too complacent over the implications of a G7 credit crunch. Irrespective of their fundamentals, Asian equities will be used as a source of funding to meet cash calls.”

After months of torrid run-ups, Asian equities are no longer cheap. And, Darby warned, despite the fact that company balance sheets are largely strong, equities are easily transformed into cash and the markets have further to fall.” Darby recommends getting into safe equities like Chinese toll roads and others.

One of the biggest questions is what the US consumer will do after decades of pulling exports from across Asia. In particular, US consumers’ insatiable appetite for Chinese consumer goods has created a US$1.3 trillion reserve surplus that China now sits on. Will the spending spree continue?

Jonathan Anderson, an economist at UBS, the Swiss investment bank, isn’t sure. In a report issued yesterday, he said that while US consumer markets remain the top spot as an export destination for most regional economies, it may not last. Although US officials are trying to assure the world that the US market is sound, UBS says the world should expect a consumer slowdown.

Anderson doesn’t believe a US slowdown would derail Asian economies, however. A sharp US recession, he says, is improbable, and even if the US were to go into recession, the Asian impact would be much lower than the 2001-2002 global slowdown as Asian consumers have started to come into their own.

Nor is China, despite its torrid growth rate, offering any particular comfort to savvy investors. Consumer price inflation bounced unexpectedly to 5.6 percent annually in July, a full percentage point above analysts’ expectations due to rising food and commodity prices. Given the vast amount of exports that China contributes to the world economy, those inflation figures are either going to be factored into global economic figures, or Chinese manufacturers are going to have to eat the higher prices and lose some profitability.

The bigger worry is that Beijing, in the words of CLSA economist Dr Jim Walker, “believes it is now an economic superpower that can buck the laws of economics,” and that fixed-asset investment, driven by interest rates that China isn’t bothering to raise, will drive the economy into even higher gear.

At some point, as consumer price inflation rises, China is going to have to raise interest rates. If they don’t, Walker writes, there will be a second round of higher food prices and systemic cost inflation as workers demand higher wages. Eventually, unless Chinese authorities get on top of the situation, the dislocations will spin out of control, driving inflation even higher.

There’s always gold. According to the Chicago Board of Trade’s website, “Over the next 12 months or so a renewed rally, quite probably to new highs, is a distinct possibility.” Investors have also toward US treasuries, driving down yields to the lowest point since 2005, the biggest decline in 18 years, since October 1989.