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After the constructive turnaround in market sentiment  on Friday, the steady rise in geopolitical tensions has created some chinks in the armor of global equity investors, with major indices under pressure to begin the new trading week.   Given the  sparse  economic calendar today, all attention from market participants will be focused on the escalating situations in Ukraine and Gaza, and  the perceived  diplomatic progress that is being made in both regions.

The diplomatic progress to call a cease-fire on the Gaza Strip has so far fallen short of the mark, with fighting intensifying to the point of cumulating into the conflict’s worse day in terms of casualties, with the Palestinian death toll now surpassing 500.   While the Israeli Defense Minister has suggested the ground offensive in Gaza is close to achieving its goals and therefore near completion, US Secretary of State John Kerry is on his way to Egypt in order to try and speed up the truce efforts.

The tensions over the downing of the Malaysian commercial plane over the Ukraine/Russian border last week have yet to subside, with findings from the US and Ukraine seeing the tragedy as a mistake carried out by the pro-Russian separatists with assistance from Russian military personnel.   As such, it is likely there will be more European sanctions to be announced against Russia within the next few days, mimicking the latest round by the US that were declared last Thursday.   The result of insufficient political action from Putin to get the pro-Russian separatists in Eastern Ukraine under control brings with it the risk of isolating Russian capital markets further, and putting more pressure on the business elite in the region.   It seems at this point that the stakes for Russia are so high that diplomacy is the only sensible outcome to this situation, with the reckless actions from the rebels forcing Putin’s hand into cooperation with Ukraine and the West.   That being said, the black-swan event risk is that Putin stubbornly refuses to let the tragedy of the downed Malaysian airline flight push politics to defuse the situation in Eastern Ukraine, and retaliation from the West passes the point of sanctions, in-turn roiling capital markets.

European bourses are broadly lower midway through their session, with the Dax, FTSE, and Stoxx off by 0.94%, 0.38%, 0.71% respectively, as the prospect of new sanctions against Russia have investors keen to move into safe-haven assets.   The earlier Yen strength on the dash from high-yield has faded, though USDJPY remains pinned in the low 101s heading into the opening bell for North America.   Yields on the 10-year US treasury are standing firm in the 2.48% region as a result of softness in the commodity complex as Brent Crude slips back to $107/barrel, which in turn has helped support the big dollar to the detriment of currencies like AUD, NZD, and CAD.

The Loonie is giving back some of its gains from  Friday’s  CPI and Wholesale Trade report, though it will likely remain at the mercy of US data until  Wednesday’s  Retail Sales print for May hits the wires.   Prior to the retail trade numbers for the Canadian economy, the most important data point for the broader financial markets over the course of the week could come  tomorrow  in the form of consumer prices for the American economy.   Given the slight shock experienced by market participants when Janet Yellen said in her testimony to Congress last week that there is a risk that rates could rise sooner than markets currently anticipate, the upcoming developments in consumer prices will be closely watched going forward.   The core and headline readings are forecast to remain stuck at 2.0% and 2.1% respectively on a y/o/y basis for June, but expect any up-tick in the readings to give USD bulls more firepower that if inflation and employment continue to pick-up speed, rate hikes might be on the horizon for early 2015.

Further reading:

EUR/USD: Trading the Existing Home Sales

EUR/USD July 21 – Attempts a recovery in low range but fails at resistance