In the U.S., the major indices punctuated a solid week with a subdued Friday session. The S&P 500 fell 0.2% to narrow its weekly gain to 1.7%, while the NASDAQ increased 0.1%. The tech-heavy index finished the week in line with the benchmark average.
Market participants went into Friday’s trading session expecting to hear some new insight from U.S. Federal Reserve Chair Janet Yellen, who delivered the keynote address at this year's Jackson Hole Symposium. Unfortunately, the speech was a disappointment to those who looked for clues about any future policy changes.
Ms. Yellen said the FOMC sees significant underutilization of labor resources and that the labor market has not fully recovered even when taking into account the recent gains. She also indicated that faster progress on goals could lead to a quicker rate increase, but this approach should be expected from a data-dependent central bank.
S&P 500 (August 18th – 22nd, 2014)
Equities, meanwhile, spent the session near their flat lines as participants showed unwillingness to step in ahead of the weekend with geopolitical concerns contributing to the cautious posture. This morning, European markets and U.S. index futures tumbled after a Russian aid convoy crossed Ukraine's border without permission from the government. However, Ukraine said it will allow the convoy to proceed in order to avoid any further issues. The initial reports were followed by comments from NATO and the Pentagon with both bodies condemning the crossing into Ukraine.
Only two sectors were able to register gains with the consumer discretionary space (advancing 0.1%) ending in the lead. Outside of the discretionary sector, most cyclical groups ended in the red, but the technology industry advanced 0.02%. The relative strength of Apple also put in a floor under the NASDAQ, which drew additional strength from biotechnology.
Meanwhile, the remaining three countercyclical sectors ended down. Consumer staples (dropped 0.2%) and utilities (falling 0.3%) settled near their flat lines, while the telecommunications services sector lost 0.4%.
Participation was well below average with fewer than 510 million shares changing hands on the New York Stock Exchange, which made for one of the quietest sessions of the year.
On Thursday, analysts were discussing technology giant Apple’s surging research and development costs. Rumors also abounded that new Apple products that may be on the way, possibly the reason why for the doubling in R&D expenses.
The company has shifted research and development into overdrive in 2014, spending $1.6 billion in the third quarter, up 36% from the same period last year. At this rate, Apple's spending will be up 60% year-over-year by the fourth quarter.
The trading community watched closely for any hints about Apple's highly anticipated product launches. Coming four years after Apple last entered a new product category with the iPad, the spike in R&D spending suggests that Apple has much more in store than a new version of one of its signature devices, analysts say.
However, analysts diverge on how close to launch the products may be. In light of the R&D spending spree, Morgan Stanley analyst Katy Huberty predicted in her report that Apple will soon enter a new product category, noting that the company ratcheted up its R&D spending before launching the iPod, iPhone and iPad. Indeed, Apple is now devoting 4% of its revenue to R&D, a level it has not reached since shortly before the original iPhone's 2007 release.
Apple (August 18th – 22nd, 2014)
Still, Apple states that R&D is a long-term plan, and a hike in spending does not necessarily mean a product launch is imminent. With little visibility into Apple's labs, it is impossible to know whether the company has boosted spending to polish off a mature product or to explore a nascent idea.
Even with the upswing, Apple's R&D spending is still modest by some measures. Computer and electronics companies generally devote 6.5% of their revenue to R&D. Microsoft, for one, has allocated 13% of its revenue for R&D each of the past three years, according to filings with the Securities and Exchange Commission.
Apple is known for its efficient R&D, analysts say. While it is costly to pioneer a new product, Apple has not had to spend huge sums in years when it merely updated its existing devices, Jackson said.
Apple has also had a year of major acquisitions, another tool companies can use to boost innovation. In the first three quarters of this year, Apple spent $898 million in cash to buy firms, almost twice the total of recent years.
For the week, Apple’s stock reached a weekly high of $101.46 on Friday after it started the week at a weekly low of $98.11 on Monday.
Equities/indices: the S&P 500 increased steadily throughout the trading week, with a slight drop on Friday. Those that traded binary options based on the value of the S&P 500 market index through a binary call option on Thursday morning would have been “in the money” by the end of the same trading day.
EUR/USD: the EUR/USD fell following news related to Ukraine on Friday. Those that traded binary options based on the value of this currency pair first thing on Friday through a binary put option would have experienced successful results by the afternoon of the same trading day.
Apple: following the news of Apple’s R&D spending and rumors of new products it may be releasing, its stock increased on Sunday. Those that traded binary options based on the value of this stock first thing on Friday morning through a binary call option would have been “in the money” by the afternoon of the same trading day.
In the week ahead, market analysts are waiting for economic data on new U.S. home sales on Monday August 25th. Analysts estimate that new homes for July will be 427,000. If actual figures beat estimates, this could push construction stocks up as well as U.S. indices such as the Dow Jones Industrial Average. Also, next week, U.S. jobless claims will be announced on Thursday August 28th and consumer sentiment figures will be released on Friday August 29th.
For most of the trading week, global stocks performed fairly well – up until a lackluster performance on Friday. As we face another week of economic and corporate announcements in the week ahead, markets will be watching closely to see how stocks and other financial assets fair as times continue to remain uncertain.
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