As concerns over AI-related stocks affected market sentiment, the Market Sentiment Thermometer stood at an extremely low 0.8 degrees, and the Nikkei plunged after the CoreWeave shock. Based on EMSI, the indicator measures investor sentiment through the relationship between the performance of high-risk stocks and their returns.
The sharp fall in the corporate bond price of US AI data-center operator CoreWeave brought the financial risks of AI-related businesses back into focus, with the effects spreading to the Japanese market. The Nikkei plunged by 3,318 yen from the previous day on the 15th, the day after the CoreWeave shock, and fell to ¥64,075 on the 20th. Concerns over funding for AI-related businesses and interest costs remain sources of short-term market risk.
Market sentiment is measured using EMSI, which calculates the rank correlation coefficient among stocks by combining their price returns with the standard deviation over the previous 10 days. This is adapted for Japanese equities into the Market Sentiment Thermometer. The reading ranges from 0 to 100 degrees, with 50 degrees neutral. Readings above 50 indicate bullish sentiment, while readings below 50 indicate bearish sentiment.
The Market Sentiment Thermometer stood at 0.8 degrees as of 20 October, which is considered an extremely bearish level. The explanation was that, against the backdrop of the CoreWeave shock, concern over risk had strengthened relative to growth expectations. Continued attention to funding conditions and interest-rate trends was also advised.
Past analysis indicates that when the Market Sentiment Thermometer is in bullish territory above 50 degrees, the Nikkei has a high probability of rising 3–5 trading days later. When it is in bearish territory below 50 degrees, the probability of a decline tends to be higher. However, there have also been cases in which stock prices subsequently rebounded when the thermometer was at an extremely bearish level of 15 degrees or below.