As the tragic news of Malaysian Flight MH17 sent shockwaves around the world last week, investors initially responded by jumping out of equities and into safe haven assets.  However, markets calmed down in the days that followed, and are now in wait and see mode on how the West will responds to Russia.
Western sanctions on Russia were already being stepped up before the Malaysian flight tragedy.  It may take some time before new sanctions are announced. Complicating the response from the west is the fact that the US and Europe have different agendas. Also the recent US spying scandal against Germany complicates the issue further and will make a unified US-European response difficult.
Further sanctions on Russia could revive fears of a tit-for-tat exchange of trade measures that could undermine the economic recovery in the euro-zone and Russia, whilst having little direct effect on the US and China.
In the end, we still believe the crisis in Ukraine will most likely subside without any major global market fall-out, short-term volatility aside.
As for the crisis in Gaza, the latest conflict between Israel and Hamas is unfortunately nothing new. It’s also set amongst other regional conflicts including Syria. It’s unlikely the current conflict will escalate outside Gaza or have any impact on the flow of oil.
The equity markets are focused on the earnings season in the US, which has been stronger than expected and also macro-economic numbers.
The most important economic data out this week will be US inflation.  We will find out if the last high inflation number was one-off noise or a sign of a new trend.
US consumer confidence doesn't seem to be swayed much by either good or bad news at the moment.  We are yet to see a pickup in consumer spending in the US. Saying that, recent credit growth and banking activity do indicate a pickup in consumer spending. It just hasn’t flowed through to official numbers yet.
Looking at the rest of the world, the market will focus on flash PMI numbers released this week. We suspect the numbers will likely confirm that:

• European growth is weaker than expected
• China’s recent stronger than expected growth numbers are accurate; and
• Japan’s slowdown will be shallower than expected with a quicker recovery.

All this comes at a time when fund manager surveys show that fund managers are significantly overweight both cash and equities. Investors have the cash to the buy the dips but why would they if they are overweight equities? This makes it hard to read the market’s direction.