HomeIs a COVID-19 Vaccine a Game-Changer for Risk On?

Is a COVID-19 Vaccine a Game-Changer for Risk On?

21 October 2020 By Mircea Vasiu

The world is getting closer by the day to find a vaccine for COVID-19, with many companies on the final stage of testing. Some are planned to begin production later this year (e.g., Moderna), some next year, and it seems rather a matter of when, not if, we will have a vaccine.

It is also encouraging the huge number of people that signed up for the trials, especially the Phase-3 trial. As the global COIVd-19 cases surge to unprecedented highs, the number of deaths from the virus starts rising too.

From an economic perspective, the longer the world continues like this, the worse the performance. Some voices argue that the state should not extend the fiscal stimulus anymore as by doing so, the level of debt in most nations will rise.

However if the population is not supported via direct stimulus, it will apply for unemployment benefits, and the social cost after that will likely be even higher. Therefore, the states will end up borrowing even more money.

Risk-On, Fiscal Stimulus, and a Vaccine

+An effective vaccine may end up having the opposite effect for risk-on than initially thought. Here is why.

A risk-on move is characterized by a higher stock market, a lower USD, as people flood into the stock market due to less attractive offers on the fixed income part of the financial markets. Any positive news so far regarding a potential vaccine, how the trials go, and so on, was received with enthusiasm by the market. Risk-on continued.

Moreover, fiscal stimulus is the one that drives the price action in the last month or so. By fiscal stimulus, we refer to the new package waited from the United States. However, the big question that arises is – will fiscal stimulus make sense anymore once the world has a safe, reliable vaccine?

The short and quick answer is no. The not so short answer is definitely yes!

With or without a vaccine, millions of Americans are unemployed. As time passes, these people will have a hard time getting back into the labor force. Moreover, the new entrants into the labor force will have an even harder time finding one due to the job scarcity and lack of experience, often cited for getting rejected in an interview.

Hence, support from the state will likely remain for years, if not decades from now. We just have to get used to the state to keep the fiscal space as accommodative as possible.

Finally, if now is not the time for governments to borrow, when is it? With interest rates at historic lows, this may be the opportunity to pile on debt and invest it in long-lasting projects a country needs (e.g., infrastructure, health care, education).