It's no secret that interest-rate and equity markets have traditionally moved in opposite directions. The steady rise in bond yields has mechanically weighed on the performance of equities, while the easing of interest rates initiated several months ago has led to a return of risk, with performances recorded on the world's stock markets, particularly in Europe. One way of illustrating this is to look at the chart below, which traces the performance of the S&P 500 (in white) and that of the TNote 10 (in blue), which, it should be remembered, moves inversely to US 10-year yields.

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Source : Bloomberg

With the notable exception of the period between May and July, when bond yields tightened while equities continued to rise, the correlation between the two assets is obvious. Translation: if the U.S. 10-year starts to bounce back sharply above 4.10%, the key threshold for the coming months, it's a safe bet that this will weigh on the U.S. stock market.

Is further easing necessarily positive for equities?

So far, rate easing has been part of a narrative that emphasizes rapid disinflation against the backdrop of a soft landing for the US economy. As long as the pillar has not been eroded, we should indeed see a continuation of the stock market rally. However, if the economy shows signs of seizing up and investors start to worry about future growth, rates could continue to ease for fear of a recession. In this less optimistic scenario, the Fed would effectively be forced to cut rates to support the economy, rather than as a result of controlled inflation.