Nomura Securities has issued a warning that the current credit turbulence surrounding US technology companies and France bears a striking resemblance to the credit shocks that preceded the collapse of the dot-com bubble in 2000 and the Lehman crisis in 2008. Historically, roughly one to two years after each "second-round shock," a "third-round shock" emerged that triggered a recession. This time, the trajectory of oil prices will be the critical variable determining whether history repeats itself.

Nomura strategist Naka Matsuzawa noted in an October 22 report that the current unease in credit markets is reminiscent of the Asian currency crisis and the LTCM crisis during the 1990s IT boom, as well as the subprime crisis and the Bear Stearns crisis during the 2000s housing boom. These events all fall into what he defines as the "second-round shock" within a decade-long credit cycle. History shows that if the Federal Reserve can pivot to rate cuts in a timely manner, the economy can return to an expansionary path without experiencing a full-blown credit crisis. However, if oil prices rise due to economic overheating rather than geopolitical factors, the central bank's policy space will be significantly constrained, making a credit crisis difficult to avoid.

Matsuzawa cautioned that the US and European central banks are currently continuing to raise rates because of rising oil prices, a backdrop that mirrors the stagflation predicament on the eve of historical "third-round shocks," suggesting that current credit concerns could escalate from localized risks into a systemic crisis. Nevertheless, if the surge in oil prices is driven primarily by geopolitics rather than demand, the Fed would still retain policy flexibility and could pause rate hikes after a shock occurs, thereby blocking an escalation into a crisis.

Historical Parallels: How Two "Second-Round Shocks" Became Systemic Crises

In the report, Matsuzawa constructed a framework for a decade-long credit cycle, categorizing major historical credit events into two phases: "second-round shocks" and "third-round shocks."

Second-round shocks are typically limited in scale and insufficient to trigger a full recession. The 1997 Asian currency crisis and the 1998 LTCM crisis both occurred within the 1990s IT boom cycle, while the 2007 subprime crisis and the Bear Stearns crisis occurred within the 2000s housing boom cycle. Both sets of events qualify as second-round shocks and neither directly caused a full-blown credit crisis or economic recession.

The critical turning point lies in the central bank's policy response. The report points out that during both second-round shocks, inflation pressures and concerns about "policy falling behind the curve" were not yet prominent, allowing the Fed to quickly pause rate hikes and pivot to cuts, successfully nipping credit contraction in the bud and setting the economy back on an expansionary path.

However, after roughly one to two years of subsequent expansion, larger "third-round shocks" erupted in succession — the dot-com bubble collapse in 2000 and the Lehman crisis in 2008 — ultimately triggering recessions. The report specifically notes that during both third-round shocks, the Fed was unable to implement monetary easing immediately after the shock, and policy was forced to lag, intensifying the severity of the crises.

Oil Prices: The Core Variable Determining Central Bank Policy Space

Matsuzawa characterizes crude oil prices as the core indicator for gauging the Fed's policy flexibility and the key to determining whether current credit concerns can be contained.

The logic chain is clear: when oil prices rise due to economic overheating or inflation pressures, central banks face a stagflation dilemma — they must address credit shocks while being unable to cut rates to stimulate the economy, with policy space squeezed from both sides. This is precisely the fundamental reason why third-round shocks historically evolved into systemic crises.

The report explicitly states that the US and European central banks are currently continuing to raise rates due to rising oil prices, with markets pricing in near-100% probability of a December rate hike in both the US and Europe, and nearly 80% probability for a December hike in Japan. This policy stance aligns closely with the macroeconomic backdrop on the eve of historical third-round shocks, constituting the most noteworthy risk signal at present.

However, the report also offers a relatively optimistic scenario: if the primary driver of rising oil prices is geopolitical factors rather than demand, the Fed can still retain room for rate cuts after a credit shock occurs, thereby repeating the history of 1997-1998 and 2007 — blocking crisis escalation through a policy pivot and keeping the second-round shock within manageable bounds.

Current Market Signals: Credit Concerns Persist, Risk Appetite Diverges

On the day the report was released, markets exhibited a complex landscape of both credit concerns and risk appetite coexisting, corroborating Nomura's assessment that the current phase constitutes a "second-round shock."

In credit markets, CDS spreads on US technology companies narrowed somewhat, but French and German government bond spreads continued to widen, indicating that European sovereign credit pressures have not yet eased. Both US and German yield curves showed a twist flattening — short-end and belly bonds weakened on rising rate hike expectations, while long-end bonds continued to attract safe-haven flows.

In equity markets, US technology and capital goods stocks led gains on strong corporate earnings, while bank stocks rebounded but notably lagged. Defensive sectors and consumer-related sectors performed tepidly. The divergence between tech stocks and bank stocks reflects the market's genuine pricing of the tension between AI-driven growth narratives and credit risk.

In commodity markets, both oil and copper prices declined, while Bitcoin and gold advanced. As for market volatility indicators, the MOVE index fell to 95.9, the VIX dropped to 16.7, and the dollar-yen volatility index also declined to 7.1, with overall volatility at relatively moderate levels. The yen traded in a narrow range between 158.0 and 158.5, lacking independent drivers.

Spillover to Japan: Bonds to Benefit, Stocks to Follow

In the report, Matsuzawa assessed short-term trends in the Japanese market, concluding that Japanese assets will primarily follow overseas market rhythms, though the ongoing escalation of credit concerns warrants attention.

Japanese government bonds are expected to benefit from rising long-end US and European bond prices and falling oil prices. Persistent credit concerns reflected in French-German bond spreads are anticipated to continue driving flows into long-term government bonds as a safe haven. Meanwhile, although oil prices fell yesterday, US and European rate hike expectations edged slightly higher, and whether the Japanese market follows this trend deserves close monitoring.

Japanese equities, in turn, are expected to receive dual support from strengthening US and European stock markets and declining oil prices. The report notes that market focus will center on whether bank stocks can rebound in tandem with technology stocks — in US and European markets, both rose yesterday, but credit concerns persist as indicated by French-German bond spreads, thereby constraining the recovery momentum of bank stocks.

It is worth noting that the market has priced in nearly 80% probability of a December rate hike in Japan, meaning that Japanese monetary policy is gradually converging with the US and Europe. Should global credit risk escalate further, the Bank of Japan's policy flexibility will likewise face a test.