Crisis? What crisis? The story of 2010 so far – and, indeed, much of 2009 – has been of the crisis that didn't happen. Markets priced in a disaster, then rallied spectacularly when it didn't materialise.
And a gradual economic recovery is taking shape. Purchasing managers' surveys around the world tell us that manufacturing activity is continuing to recover. These give us a clearer reading than official numbers, which have been distorted by bad weather in both the UK and US.
This evidence of a sustained upturn has underpinned share prices. MSCI's world index has risen by 2.5 per cent in dollar terms since 1 January, while the All-Share index has risen 5.3 per cent. Thanks to sterling's fall against the dollar, however, the UK's outperformance disappears if we measure returns in a common currency.
What's more, the VIX index – a measure of implied volatilities on S&P 500 options – has fallen to close to its lowest level since the spring of 2008. This suggests that the fear generated by the financial crisis of 2008 and subsequent recession has entirely dissipated.
There are plenty of other signs of receding fear. Corporate bond prices, which collapsed in late 2008, have rallied as the spectre of mass defaults receded. That's pushed yields back down again, and prompted record bond issuance from companies.
However, while markets have stopped worrying about companies going bust, they have taken a lot more interest in the idea of countries going bust. Although all the attention recently has focused on Greece and other 'club med' countries in the eurozone, there are ongoing sovereign debt problems in Iceland and parts of central and eastern Europe. The UK has also been touted as a possible crisis candidate, although we think this is less likely.
Finally, despite all the money printed around the world, there is precious little sign of inflation re-emerging – at least, not for the remainder of this year. In fact, inflation could fall sharply not so much because we get good news about prices this year, but simply because last year's bad news – big rises in petrol and import prices – falls out of the annual comparison of the price level.
