Confidence took a hammering across Asia this morning as dreadful overnight data from the United States and a dismal reading from the Japanese economy sent shares into a tailspin.

Both Tokyo and Hong Kong stock markets plunged more than 4 per cent in a move that erased all the gains made so far this year.

Investors pointed to the abject drop in US retail sales last month as evidence that the strong gains on Asian markets in the first five sessions of the year had probably been classic examples of a “sucker’s rally”.

The 2.7 per cent slump in American consumer spending was twice as bad as most had feared, and few Asian investors believe that the region has any kind of immunity to that pace of decline.

Exports from Japan, Taiwan and Korea are sliding with alarming speed, and economists believe that the so-far limited drop in exports from China is merely lagging a collapse that will soon prove just as damaging.

There was some hard evidence of that today. Machinery orders, which are seen as an accurate gauge of the health of the Japanese economy, plunged by a record 16.2 per cent in November.

That number was twice as bad as the market had feared and speaks of a worse and more widespread collapse of manufacturing throughout Asia and the rest of the world.

Japan is the world’s biggest exporter of machines that make other goods: when its order book dries up, it proves that the world’s manufacturing and industrial hubs are falling silent.

For Japan, said Kyohei Morita, a Barclays Capital economist, this is merely the prelude to greater miseries ahead: “At this stage, Japanese exports start to run into trouble … in short, we believe the real test to the Japanese economy is only now getting under way.”

Traders across the region bemoaned the sudden death of the “Obama rally” — the strong recent performance of stocks driven by a belief in the US President-elect's plans for economic revival.

Weighing heavily on sentiment was the gathering sense of gloom once again surrounding the global financial sector and the massive capital raising efforts required by the industry’s biggest names.

Japanese banks may soon find themselves among those with liquidity issues, analysts said.

In Japan the Nikkei 225 index tumbled more than 300 points to the 8,100 point level, a “danger zone” that threatens the capital adequacy ratios of Japanese banks and may force further capital raisings.

The Hang Seng, where HSBC carries a large weighting and sentiment on the banks has taken a beating, shed 4.7 per cent in the morning session.

The Korean Kospi index lost about 5 per cent in a session that brokers said had experienced heavy selling by foreigners.

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