|FOCUS08/04/20191Rates–Buy6m2yatmf-5/atmf+10/atmf-25PayerSwaptionladder.Buy10yTIPSbreakeven.Credit–LongUScorporatecreditwithapreferencefornon-financialcredit.Equities–BuyBNPParibasEquityLowVolatilityEuropeETF(EVOEFP),ref.EUR125.6Equities–LongSX5EJune2019ATM(3450)callfor1.2%.Alternatively,June20193450-3550(100%-103%)SX5Ecallspread,for0.8%(3.6xmaxreturntopremium)oraDec-19100%-110%SX5Ecallspreadfor2%,contingentonahigherEUR10-yearCMSrate.Premiumsindicative.TRADEIDEASFOCUS|GLOBAL08April2019US2s10s–APavlovianResponseKEYMESSAGESIt’snotaboutarecession.It’saboutdisinflation.Disinflationwithoutarecessionmaysupportriskyassets.Sellratesvolatility,buyinflationprotection.FlatterUS2s10sdoesnotsignaltighterUScreditconditions.LowerratestermpremiummayleadtohigherP/EinSPX.Lowerratestermpremiummayfavourlowvolfactorinequities.In1927,Pavlovconductedhisfamousexperimentonclassicalconditioning.Helookedattheassociationofanunconditionalstimulus(UCS)–astimulusthatproducedaninvoluntaryorunconditionalresponse(UCR),withaneutralstimulus(NS),astimulusthatdoesnotgenerateanUCR.Inhisexperimenthegavemeatpowder(UCS)todogsandobservedtheysalivated(UCR).Independently,herangabell(NS)andthedogsdidnotsalivate.Whenherepeatedlypairedthemeatpowder(UCS)withabell(NS),thedogs'responsechangedsothattheysalivatedatthesoundofabellevenwhentherewasnomeatpowderpresent.Pavlovwasabletoelicitareflexiveresponsetoapreviouslyneutralstimulus.PleaserefertoimportantinformationandMARdisclosuresattheendofthisreportEQUITY&DERIVATIVES|G10INTERESTRATES|CREDIT|QUANTITATIVESTRATEGYKaushikBanerjee,HeadofGlobalMacroResearch|BNPParibasLondonBranchShahidLadha,HeadofStrategyforG10RatesAmericas|BNPParibasSecuritiesCorp.EdmundShing,GlobalHeadofEquity&DerivativeStrategy|BNPParibasLondonBranchKrisGjini,MacroQuantitativeStrategist|BNPParibasLondonBranchDoesPavlov'sexperimentonclassicalconditioningholdtruefortheUS2s10scurve?Isafallinglobalinflationexpectationsalongwithayieldcurveflatteninggeneratingaconditionedresponseofanexpectedrecessi...
