GO
Loading...

Why markets 'reek of complacency' right now

With global markets broadly shrugging off heightening geopolitical tensions following the downing of the Malaysia Airlines flight in Ukraine, analysts are warning that investors are becoming too complacent.

After a selloff on Wall Street Thursday as news of the downing of Flight MH17 emerged, U.S. stock markets were back in business on Friday, rebounding strongly. Meanwhile, the CBOE Volatility Index (VIX) which staged its largest rally in 15 months on Thursday, fell back 17 percent on Friday to 12.06, well below historical norms.

In early morning trade on Monday, Australian and South Korean also saw gains of 0.25 percent and 0.4 percent respectively. Japan was closed for a public holiday.

Read MoreWhat real traders (not the machines) worry about

"You look at the way markets went out on Friday and you'd have to say it reeks of complacency, in terms of the geopolitical landscape and how things could unfold this week, in particular how Russia responds to the mounting international outrage," Ray Attrill, co-head of FX strategy at National Australian Bank, told CNBC's "The Rundown" on Monday.

On Sunday, France, Britain and Germany warned Russia it could face further European Union sanctions if it did not press the separatists in Ukraine to allow unfettered access to the crash site. The pro-Russia separatists and Russian military personnel have been blamed by U.S. officials for the downing of MH17, which was en route to Kuala Lumpur from Amsterdam, killing all 298 passengers on board.

NAB's Attrill said the ultimatum was a worrying sign: "That's a pretty strong statement that tells you how far things could go in terms of the whole E.U.-Russian relationship."

Read MoreAmid Ukraine and Gaza, China default raises fears

"If we do see much more punitive action in terms of sanctions, [and] how Russia responds to that in terms of the security of gas supplied back into Europe, that has macro-economic implications," he added.

If geopolitical tensions do flare up again this week, investors could continue to pile into safe haven assets like the Japanese yen and U.S. dollar.

Joshua Hodge Photography | E+ | Getty Images

"If we do see things escalate on that front, it has the potential, alongside developments in the Gaza strip to cause a more of a risk-off tone," Attrill said. "In that environment the U.S .dollar will draw support, and if volatility levels rise, then some of the countries doing well at the moment, so the likes of the Australian dollar and the New Zealand dollar, and possibly the euro, I would expect to underperform," he added.

Other analysts also warned that geopolitical risks could come back into focus this week.

Read MoreGaza, MH17 put Wall Street on edge: Art Cashin

"There is no denying that the global political tensions are going to affect the volatility of trading," said Evan Lucas, market strategist at IG.

"The more pressure that builds on Russia the more volatile European indices will be. With the strong trade links between the continent and Russia, any disruptions to this through sanctions will cause profit taking on European indices," he added.

But Tim Condon, head of Research-Asia at ING Financial Markets, told CNBC it would take a very serious risk event to shock investors out of their current mood of complacency, which has persisted for a while now.

"Monetary conditions in the G3 have crushed volatility and investors are right to think that as long as these policies persist volatility is going to remain low and it's going to take something really serious to shock them out of it...tensions in the Middle East are not new," he said.

Condon added that in his view, it was more likely that an economic event will shock investors out of their complacent mood.

For instance when markets begin to price in a Federal Reserve interest rate hike, which he expects to come in mid-2015.