View from City Road: Dow defies the law of gravity

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So far, bulls of the British equity market have been able to draw some comfort from the performance of Wall Street. There have been rising worries about the outlook for US inflation as the recovery gathered pace ever since the autumn, concerns that have reversed the downwards drift in yields on long-term US government bonds.

Having dipped below 5.7 per cent, 30-year US Treasury yields are back to 6.3 per cent. Given the nervous linkage between the gilts and equity market in London, you might have expected the Dow to crumble. But instead it has hardly caught breath.

For some this is evidence that US share prices are beginning to draw sustenance from rising corporate earnings as the recovery gets under way. On this view the Dow will be less reliant on the unattractiveness of alternative homes for savings - low money market interest rates and low bond yields - and driven more by the natural force of profits growth as volumes and margins pick up.

However, enthusiasts should note that there has not yet been a rise in US short-term interest rates. True, the recent appointment of the Keynesian George Perry from the Brookings Institution to the Federal Reserve Board will strengthen its already evident sensitivity to unemployment.

But if US growth picks up much above 3 per cent again, the Fed may have to raise rates to preserve its credibility. That may have more effect on savers - and the Dow - than the movement in long bond yields.