Credit worries back in focus

NEW YORK (CNNMoney.com) -- U.S. stock futures were weaker Friday after the bail out of a major mortgage lender in Britain highlighted the ongoing problems in the global credit markets. Record high oil prices also pressured sentiment.

The Bank of England said Friday it was providing emergency funding to British mortgage lender Northern Rock, which has been hit by the global liquidity crisis.

The news sent stocks in Europe tumbling, and is likely to weigh on U.S. investors when trading in New York starts.

Wachovia chief economist John Silvia said the problems at Northern Rock are hurting futures here even though its shares aren't traded in the United States because it reignites concerns over hidden credit problems at a wide range of financial firms.

"They're worried about how many other surprises there are," he said. "There are probably a number of hidden stories still out there."

A repricing of risk in the credit markets has tightened liquidity, making it more difficult for banks to borrow money.

A report from the Federal Reserve released Thursday showed the amount U.S. banks borrowed from the Fed climbed to $7.2 billion outstanding on Wednesday alone, pushing the one-day level to the highest point since the day following the 2001 terrorist attacks.

Despite the ongoing problems in the credit markets, stocks have been boosted by the growing likelihood that the Fed will cut rates next Tuesday. The Dow surged 133 points, or about 1 percent, on Thursday. Asian markets rallied overnight, cheered by Wall Street's advance.

Oil prices, which closed above the $80 a barrel mark for the first time Thursday, could also weigh on investors. A sustained surge in energy prices could fan inflation and limit the Fed's ability to cut interest rates.

But oil fell below that $80 benchmark in early trading Friday, with a barrel of U.S. light crude losing 57 cents to $79.52 a barrel.

Treasury prices rose in early trading, taking the yield on the 10-year note to 4.43 percent from 4.46 percent late Thursday. The dollar rebounded against the euro but lower versus the yen.

There are a number of key economic reports due Friday that will get attention from investors eager for clues as to what the Fed will do with rates next week.

First up was the Census Bureau reading on retail sales, which showed sales up 0.3 percent, less than the forecast of a 0.5 percent increase from economists surveyed by Briefing.com.

Excluding autos, sales were even more disappointing, falling 0.4 percent, rather than the 0.2 percent gain that had been forecast. The weak sales came despite major retail chains such as Wal-Mart Stores (Charts, Fortune 500), which generally reported strong sales comparisons for the month that included back to school sales.

At 9:15 a.m. ET, the Federal Reserve reports on industrial production and capacity utilization for August, with economists seeing little change from July readings. Then at 10 a.m. comes a report on business inventories and a survey of consumer confidence from the University of Michigan.

In corporate news, shares of General Motors (Charts, Fortune 500) were up 1.3 percent in Frankfurt trading early Friday after the United Auto Workers union designated the company late Thursday as the target to reach the first contract agreement among the traditional Big Three automakers.

That designation gives the nation's No. 1 automaker a strategic advantage over rivals Ford Motor Co. (Charts, Fortune 500) and Chrysler Group, which agreed with the union to an indefinite contract extension past Friday's 11:59 p.m. ET contract expiration as their talks took a back seat. But the designation as a target raises the risk, at least in theory, that GM could be hit with a strike.

GM was not given an extension, although many experts have said they wouldn't be surprised if talks extended past Friday's deadline, despite reports that GM locals at the union were preparing picket signs and telling members to get ready to strike.

"Tensions (are) always mounting as we get to the deadline, but this is standard operating procedure," said auto industry consultant John Casesa, who termed the union's preparations mere saber-rattling. "It is standard operating procedure to say we are prepared to go out if we have to go out. I don't think it means anything -- I really don't."

In other corporate news, Cadbury Schweppes (Charts) has rejected an offer of between $13 billion and $14 billion for its soft drink business from a group of private equity firms, according to a report in the Financial Times.

The rejection could be seen as another sign of trouble in credit markets as the potential buyers reportedly wanted Cadbury to be involved in financing the sale, which prompted the rejection of the offer. Shares of Cadbury slipped 0.5 percent in London trading.

Goldman Sachs' (Charts, Fortune 500) Global Alpha hedge fund declined 22.7 percent last month, the worst month in the flagship fund's 12-year history, according to a report in the Wall Street Journal Friday.