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What to Expect From Trump's First State of the Union Speech

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Asia bond investors eschew protection for higher yields, the world prepares for Donald Trump’s State of the Union speech, and Indonesia offers a warning against protectionism. Here are some of the things people in markets are talking about.

Asia Junk Bonds Get Junkier

Asian bond investors may be taking their eyes off the protections on junk bonds in the pursuit of higher yields. The quality of covenants, which are clauses in bond documents that restrict issuers from certain activities that weaken their ability to repay debt, is deteriorating, according to Moody’s Investors Service. Its analysis of 10 junk bonds worth $3.34 billion in the last quarter of 2017 showed that covenant strength fell to the lowest level since Moody’s started scoring it in 2011. As ample cash conditions drive spreads of investment-grade credits to their tightest in more than a decade, investors are turning to lower-rated names which come with added risks. The pace of high-yield offerings has accelerated in 2018 after hitting a record $55.8 billion last year, according to data compiled by Bloomberg.

Trump's Big Speech

President Donald Trump’s State of the Union address late Tuesday evening in the U.S. will be one of the president’s last, best chances to win over more of the American public to his nationalist agenda ahead of midterm elections that will be a referendum on his tumultuous administration. White House officials say the president will dial back his signature combative posture and instead frame his policy proposals -- from immigration to infrastructure -- as areas where Democrats and Republicans can work together. Trump will still take ample time to argue that the U.S. economy has been revitalized by policies that have had little to no bipartisan appeal, including the tax overhaul and efforts to curb regulations.

Indonesia’s Trade Warning

Trump’s protectionist trade policies are raising concerns of a potential setback to three decades of global economic progress, according to Indonesia’s Finance Minister Sri Mulyani Indrawati. "Globally we have to recognize that openness and global trade is actually helping a lot of countries to have a shared prosperity and reduce poverty," Indrawati said in a Bloomberg Television interview in London on Monday. “The current protectionist language is definitely going to create concern about whether globally there will be a setback in the progress that has been made over the past three decades."

China’s Coal Quagmire

In the latest reminder that coal still dominates the world’s biggest energy consumer, Chinese power producers are warning of supply tightness while one northern province plans to pause switching homes and industries to natural gas to avoid further heating shortages. Four of China’s biggest generators sent an "emergency report" dated Jan. 22 to the National Development & Reform Commission, the top economic planner, requesting help with thermal coal supply, according to China Business News. Meanwhile, Hebei, which surrounds Beijing, will stop approving coal-to-gas conversions in rural areas until new natural gas supply can be secured.

Coming Up…

Asian equities look poised to open in the red as all major U.S. stock indexes declined Monday. Before Trump’s big speech, Asia traders have New Zealand trade, Australian business confidence and Japanese unemployment and retail sales to keep them busy. Later on Tuesday, BOE Governor Mark Carney speaks before the U.K. Parliament’s Economic Affairs Committee in London, and ECB Governing Council Member Yves Mersch speaks in Frankfurt. We also will see a rate decision in Hungary, euro-area consumer confidence and GDP, German inflation, French GDP, Turkish inflation, U.S. consumer confidence and Mexican GDP.

What we’ve been reading

This is what caught our eye over the last 24 hours.

— With assistance by Garfield Clinton Reynolds, Justin Sink, Margaret Talev, Jennifer Jacobs, Karlis Salna, David Yong, and Lianting Tu

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