Have we already seen the top of the market?

Money Morning has been all about the central banks this week and I'm afraid that's not going to change today.

Minutes from the European Central Bank's latest meeting gave markets palpitations yesterday.

The ECB freaked markets out by discussing a possible end to money printing in the region.Quelle horreur!

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

So what now?

A furtive cough and a raised eyebrow

Markets were already on edge, because ECB boss Mario Draghi has been a bit more optimistic in recent speeches. He doesn't seem to be trying to talk the eurozone down anymore.

And the minutes confirmed this new good cheer. As the Financial Times reports: "Officials discussed whether to end the central bank's promise to step up the pace of asset purchases if needed to stimulate the eurozone economy". In the end, they didn't change this wording. But they "did end a similar promise to cut interest rates further if warranted".

Just to be very clear here, nothing practical changed. The ECB is still buying €60bn a month of eurozone debt. All that altered was the tone of their discussion.

What we saw was something the FT describes admittedly a little histrionically, but that's what we journalists do for a living as a "bond rout".

German ten-year bond yields hit their highest level since January 2016. The US ten-year Treasury yield rose to 2.36%. It has been a fair bit higher this year (it got to 2.6% earlier in the year) but the point is that it's now moving back up again, which is worth monitoring.

Rising bond yields mean the cost of borrowing is going up, and that's why markets get jittery when it happens. Tighter money means less cash to splash.

Stocks didn't like that either the S&P 500 slipped by 0.9%. That really doesn't sound like much and, frankly, it really isn't.But in the context of today's soporific markets, it represents a bit of a jolt it was the third-worst trading day of the year so far, apparently.

Now, markets are based on expectations ie, predictions about the future. So it makes sense that the implied intentions of a central bank can make them move.

Equally, we're at a juncture where small shifts in absolute terms have an outsize relative impact. If interest rates rise from 5% to 5.25%, that's not a big move. But if they rise from 0.25% to 0.5%, they've doubled.

However, it will never cease to amaze me that apparently free markets around the world spend most of their time hanging on the word-by-word nuances of a few key committee meetings in global capitals.

Forget the economy. Forget corporate reports. What really matters is a raised eyebrow from Draghi or a furtive cough from Janet Yellen at the US Federal Reserve.

Break out your watch list

And until they've figured out what they think it means, discretion will be the better part of valour. That generally means less risk-taking, which means lower asset prices.

What would turn it around at this point? One positive for markets would be signs of growth that convince investors that we're not about to hit the end of this particular business cycle, even as the Fed and its fellow central banks pump up interest rates. In other words, signs that the economy is genuinely capable of dealing with higher rates.

Alternatively, fiscal stimulus from governments would probably do it too. It wouldn't be good for bonds more government borrowing just as central banks are withdrawing their blank cheques should drive yields higher but it would cheer up equity investors.

Either of those options would mean a "rotation" rather than an outright slide in markets. Tech stocks would likely continue to slip, but banks and miners and "value" would take up the slack.

For now though, the default view seems to be that central banks are making a "mistake". By mistake, the market means anything that might stop stocks from going up in a straight line. Because as we should all know by now, that's the key role of a central banker.

And if evidence doesn't appear to confirm inflation or economic strength or rising wages, or governments don't step into the breach, then I suspect we'll see a panicky reaction.

The big question then is: will the Fed and global colleagues stick it out? Or will it talk markets down from their latest "taper tantrum"? So far, it has made sense to bet on the Fed beating a hasty retreat, and I see no reason to change that view.

So here's what I'd do. Build up some cash reserves, check out the stocks and investment trusts on your watch list, and look for opportunities to buy them at lower levels in the coming weeks or months. This may not be "the big one" but it could create some interesting buying opportunities.