Stock markets in the region tumbled in active trading: Japan (-6.6%), Hong Kong (-8.9%), Singapore (-7.7%), South Korea (-12%) -- at the time of writing.

The foreign exchange market is relatively calm. But this is partly due to the fact that the market is unable to function fully because of uncertainties related to settlement (in New York). But overall, financial institutions appear to be able to activate emergency or back-up systems, and the relative calmness of the market actually signifies the maturity and resilience of the markets and the institutions.

The impact of the US tragedy has yet to be fully understood. Globally, security issues will be looked at in a different dimension.

Gold and oil prices shot up immediately, the USD softened somewhat against the EUR and JPY. The threat to US security should lead to a rise in the risk premium of US assets relative to other assets globally. This is likely to place more downward pressure on the US stock market than before (previously the downward pressure was from worsening corporate earnings). The role of the USD as a destination for the flight to quality is now less clear. But what the US government's reaction to the event has yet to be seen, and this could sway sentiments.

More directly, the disruption to business will have a negative impact on the US economy. Consumer and investment sentiments will also be negatively affected. Re-construction works after things settle down and the likelihood of increased military spending will benefit the US economy in due course, but these will not happen in the short term. In any case, so far as east Asia is concerned, the negative impact arising from less consumer spending in the US will far outweigh the positive impact of increased investment.

The Fed is widely expected to cut short-term interest rates aggressively (50 - 75 bp) and to provide ample liquidity to the market in an effort to avoid liquidity problems in the global financial system. There may even be concerted liquidity easing efforts by central bankers around the world. Co-ordinated FX market intervention efforts could not be ruled out.

The authorities in Japan and Hong Kong have made clear their intention to financial institutions and their customers: financial markets in Asia (and by implications, those in Europe) have to remain open and have business as usual as far as possible. This is exceedingly important to keep global financial markets functioning now that New York is down.