While stocks are having second thoughts this morning as euphoria appears to have returned to markets for the time being, yesterday’s abrupt reversal in the S&P to the FOMC Minutes revealed that for many, the era of goldilocks may be ending ending. This morning, none other than Japan’s largest life insurer, Nippon Life Insurance, confirmed as much, saying that it will sell Japanese shares when they rise further, as the rally in risk assets driven by expectations of a “Goldilocks” scenario continuing is nearing an end, its chief investment officer told Reuters on Thursday.
Nippon CIO, Hiroshi Ozeki also said that the insurer expects the dollar to soften further against the yen but it is ready to buy the U.S. currency when it falls below 105 yen.
Agreeing with Nomura, which last week said that investors will have another chance to buy lower, Ozeki said that although global shares have bounced back in the past week or so, Nippon Life expects risk assets will be pummeled again.
But his most notably observation was that the era of “Goldilocks” is on its last breath: the CIO said market expectations of a scenario that is neither too hot nor too cold are based on the assumption of three “moderations”: moderate economic growth, moderate inflation and a moderate rise in asset prices.
“When any of those three disappear, there will be market corrections,” he said. ”Since Abenomics began (in 2012), our stance on Japanese stocks has been to ‘buy-on-dips’.
“But with their valuations at lofty levels” he said “we are no longer increasing our stock portfolio.“
Instead “As the end of Goldilocks markets approaches, we have to prepare ourself for tumbles in share prices,” he said.
Separately, FX traders who frontrun Japan’s insurance fund purchases will be happy to know that while Nippon Life expects the dollar could fall further against the yen, the insurer is now ready to buy dollars below 105 yen, Ozeki said as the greenback is “approaching levels in line with its fair value in purchasing power parity terms.”
Back to equity markets, Ozeki said that while the company does not expect a major market crash yet, he expects a real test for markets to come when the combined balance sheet of the world’s three biggest central banks – the Federal Reserve, the European Central Bank and the Bank of Japan – start to shrink.
Of course, as of this moment while the Fed started to trim its balance sheet, the ECB and the BOJ are still gobbling up bonds. But that is expected to change by early 2019 when all three central banks are expected to start withdrawing liquidity from the market.
Finally, Ozeki opined on what he believes is the biggest bubble: “everybody is trying to see if any bubbles are formed anywhere…I would think government bonds are the most expensive and what comes next will be a burst of the government bond bubble, even if not right away” he added.
Which, for his native Japan, where the 10Y yields below 0.1% only due to the constant intervention of the BOJ, will be a very big problem.
via Zero Hedge http://ift.tt/2HFVDW4 Tyler Durden