Nomura warns: current AI credit risk closely resembles the internet bubble and pre-Lehman crisis, oil prices become the key variable

Nomura has issued a warning that the current credit turmoil surrounding US technology companies and France is highly similar to the credit shocks on the eve of the dot-com bubble collapse in 2000 and the Lehman crisis in 2008. Historically, roughly one to two years after each "second-round shock," it evolved into a "third-round shock" that triggered a recession. This time, the trajectory of oil prices will become the key variable determining whether history repeats itself.

In a report released on October 22, Nomura strategist Naka Matsuzawa pointed out 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 belong to 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 time, the economy can return to an expansionary path without experiencing a full-blown credit crisis; but if oil prices rise due to economic overheating rather than geopolitical factors, the central bank's policy space will be greatly compressed, and a credit crisis will be difficult to avoid.

Matsuzawa warned that US and European central banks are currently continuing to raise rates due to rising oil prices, a backdrop that mirrors the stagflation predicament on the eve of the historical "third-round shocks," meaning the current credit concerns have the potential to escalate from localized risk into a systemic crisis. However, if the driver of rising oil prices comes mainly from geopolitics rather than the demand side, the Fed would still have policy flexibility to pause rate hikes after a shock occurs, thereby blocking the escalation of the crisis.

Historical Lessons: How Two "Second-Round Shocks" Evolved into Systemic Crises

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

Second-round shocks are usually limited in scale and not yet sufficient to trigger a full recession. The 1997 Asian currency crisis and the 1998 LTCM crisis both occurred within the 1990s IT boom cycle; the 2007 subprime crisis and the Bear Stearns crisis occurred within the 2000s housing boom cycle. Both sets of events belong to the second-round shock category and neither directly led to a full-blown credit crisis or economic recession.

The key turning point lies in the central bank's policy response. The report notes that when the above two second-round shocks occurred, inflationary pressures and concerns about "policy falling behind the curve" were not yet prominent, so the Fed was able to quickly pause rate hikes and pivot to rate cuts, successfully nipping credit contraction in the bud, and the economy subsequently returned to an expansionary path.

However, after roughly one to two years of expansion, larger "third-round shocks" erupted in succession—the dot-com bubble collapse in 2000 and the Lehman crisis in 2008—and ultimately triggered recessions. The report specifically notes that when these two third-round shocks occurred, the Fed was unable to implement monetary easing immediately after the shock, and policy was forced to lag, which intensified 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 measuring the Fed's policy flexibility and the key to judging whether the current credit concerns can be contained.

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

The report explicitly states that US and European central banks are currently continuing to raise rates due to rising oil prices, and the market has priced the probability of December rate hikes in the US and Europe at close to 100%, with the probability of a December rate hike in Japan also close to 80%. This policy stance is highly consistent 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 main driver of rising oil prices comes from geopolitical factors rather than the demand side, the Fed can still retain room for rate cuts after a credit shock occurs, thereby repeating the history of 1997-1998 and 2007—using a policy pivot to block crisis escalation and keep the second-round shock within a manageable range.

Current Market Signals: Credit Concerns Persist, Risk Appetite Diverges

On the day the report was released, the market presented a complex picture in which credit concerns and risk appetite coexisted, corroborating Nomura's judgment that we are currently in the "second-round shock" phase.

In credit markets, CDS spreads on US technology companies narrowed somewhat, but the spread between French and German government bonds continued to widen, indicating that European sovereign credit pressure has not yet eased. Both the US and German yield curves showed twist-style flattening—short- and intermediate-term bonds weakened on rising rate-hike expectations, while long-term bonds continued to attract safe-haven flows.

In equity markets, US technology stocks and capital goods stocks led gains on strong corporate earnings, while bank stocks rebounded but clearly lagged, and defensive and consumer-related sectors were lackluster. The divergence between technology stocks and bank stocks reflects the market's true pricing of the tension between the AI-driven growth narrative and credit risk.

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

Transmission to the Japanese Market: Bonds to Benefit, Stocks to Follow

In the report, Matsuzawa assessed the short-term outlook for the Japanese market, concluding that Japanese assets will mainly follow the rhythm of overseas markets, but the continued fermentation of credit concerns is worth watching.

Japanese government bonds are expected to benefit from rising long-term US and European government bond prices and falling oil prices. Persistent credit concerns reflected in the French-German government bond spread are expected 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 have edged up slightly, and whether the Japanese market follows this trend is worth close observation.

Japanese equities, meanwhile, are expected to be supported by both stronger US and European stock markets and falling oil prices. The report notes that market focus will be on whether bank stocks can rebound in tandem with technology stocks—in US and European markets, both rose yesterday, but credit concerns persist as shown by the French-German government bond spread, which constrains the recovery momentum of bank stocks.

It is worth noting that the market has priced the probability of a December rate hike in Japan at close to 80%, meaning that Japanese monetary policy is gradually converging toward that of the US and Europe. Once global credit risk escalates further, the Bank of Japan's policy flexibility will likewise be tested. Risk Disclosure and Disclaimer

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