US:

US bank shares are set to drop because loans made for commercial real estate will sour and lenders will need to raise more capital to cover credit losses, according to Mike Mayo, an analyst at CLSA Ltd. Mayo added that regional banks will perform the worst among US lenders because they have the biggest exposure to loans for commercial real estate. (BBG)

In other news, banks are managing to liquidate hundreds of billions of dollars worth of CDOs given that in recent weeks more investors have been buying the underlying assets at deep discounts (thus permitting liquidation). (FT)

Bank of America has said it will pay the government USD 425mln to cancel an unused guarantee of Merrill Lynch Co.'s assets and cut reliance on federal support. (BBG)

Asia:

Japanese markets closed for national holiday.

Overnight the Asian Development Bank highlighted that regional economies will expand at a faster-than-expected pace this year. However, they warned that withdrawing expansionary policies too early may lead to a double-dip decline in Asia. It still sees a V-shaped Asia recovery but notes external demand remains weak and sees China's GDP growth at 8.2% in 2009, 8.9% in 2010. (RTRS)

In other news, China industry ministry said that Chinese companies still lack incentives to invest; adding that Chinese industry is at a critical phase of rebounding. Ministry further said that Chinese stimulus policies must be maintained and China pledges more measures to help small businesses. (BBG)

GLOBAL:

The framework for sustainable economic growth that the Group of 20 leaders are poised to agree on Friday will lack a powerful enforcement mechanism, officials conceded yesterday. (FT)

In geopolitical news, Iranian President Ahmadinejad said that no enemy dare to attack Iran and wants US out of the middle-east. (BBG) Also news has been emerging that Iran has made new generation of centrifuges. (RTRS)

Bonds

European Government Bonds:

EGB's traded lower on the back of strength in equities as well as comments from the Asian Development Bank that regional economies will expand at a faster-than-expected pace this year, fuelling sentiment that global economic growth is emerging faster and stronger than previously anticipated.

ECB's Weber said that current level of interest rate is appropriate; adding that at this stage it is too early to exit the currently extremely loose monetary policy. Weber also said that lower potential growth rate of output could mean inflation risks emerge earlier. He also mentioned that as the recovery becomes assured, withdrawal of monetary stimulus will move to the forefront of the monetary policy agenda. (RTRS)

In other news, German finance minister Steinbrueck said that Germany still faces "enormous" systemic risks, especially among its state-owned banks or ‘landesbanken'. (Les Echos) The French finance minister Lagarde said that crisis will be over when economy creates jobs; adding that markets suggest worst is over. He also said that market rebound may make G20 accord a challenge. (BBG)

Supply today from the Euro-Zone:

* Dutch DSL Tap auction for EUR 25mln vs. Exp. EUR 0.3-0.7bln, 5.5% 15-Jul-10

* Dutch DSL Tap auction for EUR 500mln vs. Exp. EUR 0.3-0.7bln, 4% 15-Jul-16

* Dutch DSL Tap auction for EUR 400mln vs. Exp. EUR 0.3-0.7bln, 5.5% 15-Jan-28 (BBG)

* Italian extraordinary BTP Tap auction for EUR 2bln 5% 01-Mar-25, Bid/Cover 2.03 vs. Prev. 1.6 (BBG)

Gilts:

Gilts traded lower following strength in European and Asian equities and comments from the Asian Development Bank. In other news, UK Prime Minister Gordon Brown said the global economy has yet to feel the biggest impact of government-led spending programs to stimulate demand and reiterated concerns about removing them too early. (BBG) The gilt market now looks ahead to the second of the week's reverse auctions targeting the March 2036 to December 2055 maturities.

Equities

UK and European bourses have traded higher this morning attributed mainly to a reversal in the USD index which has seen commodities across the board trade higher. The move has resulted in an out performance for the basic material and oil and gas sectors. Comments from the Asian Development Bank were also noted.

FX

USD index has been on a downward trend since the European open paring the gains seen yesterday. As a result high beta currencies gained ground on the back of USD weakness. EUR/USD hits a one-year high, whereas NZD/USD hits a 13-month high.