European Credit Pain Spread Across Atlantic

U.S. stock futures are pointing lower this morning as new credit worries in Europe drag down banking shares there and wipe out yesterday's euphoria in the financial sector.

Bank of England to the Rescue

Northern Rock, one of the largest U.K. mortgage lenders, confirmed reports that it is getting extra liquidity from the Bank of England. The reports first circulated Thursday. This is just a day after unrelated but soothing statements from the Bank of England helped lend support in credit markets. The news about Northern Rock circulated yesterday afternoon just as the Fed disclosed the highest level of borrowing at its discount window since September, 2001.

European bank shares are under pressure this morning and European stock markets are all lower. Asian markets closed higher, following through on the U.S. rally in financial shares.

Consumer Check-Up

A big focus for U.S. stocks Friday will be the August retail sales report, but a batch of other data will also keep the markets busy.

Retail sales are expected to be up 0.4%. "I think we're going to get about as expected," says CNBC's Rick Santelli. "I think it's going to show the consumers legs haven't been cut off yet."

Dented Dollar

The dollar holds near its lows this morning. It had a reprieve Thursday from its recent slump to record lows, gaining 0.1 % against the euro. It rose 0.9% against the yen. Since the beginning of the year, the dollar has lost 4.9% against the euro and 3.2% against the yen.

"I think the absolute most important thing continues to be the dollar and we have to watch import prices moving up on the goods exported from China," says Santelli. "China's internal inflation numbers are running high, and because of the yuan's close relationship to the dollar, they're being forced to pay high commodities prices too. That something we need to pay very close attention to."

In yesterday's blue chip led rally, the star performer of the day was the Dow, which gained 133 points or 1%, putting it up three of the last four trading sessions. At its current level of 13,424, it is 4.1% away from that record close of 14,000 hit on July 19. The Nasdaq was up just 9 points and the S&P gained 12. Big cap blue chips, like GM , benefiting from positive sentiment about its union talks, and McDonald's which bumped its dividend, were big boosters. GM was chosen by the United Auto Workers to be the lead negotiator in contract talks.

Stock traders were also cheered Thursday by some positive news in the financial sector. Trodden-down mortgage lender Countrywide Financial was able to secure $12 billion in additional borrowing capacity. Its stock jumped 14%.

Santelli said credit markets were also bolstered by a run up in Eurodollar futures, which reflects LIBOR. "It was the first day in weeks that we saw an upside range in the front month Eurodollars," he said.

Brokerage stocks were top performers, up 2.58%.

"We saw traders and we saw institutions buying and they were all chasing each other's tails," said a trader who deals in broker stocks. Brokerage earnings start Tuesday with the release of Lehman Brothers earnings before the bell, coincidentally the same day as the Fed meets. The group has been under pressure on fears the Wall Street firms have taken hits from the turmoil in credit markets.

The Wall Street Journal's Heard on the Street column today looks at upcoming brokerage earnings. It highlights the concern that there could be more guess work about the value of securities holdings because of an accounting rule change. The change requires firms to detail which assets have real market prices versus the ones based on models, and those models are where the management guesses come in.

Oil Drill

Oil is slightly weaker this morning after closing above $80 per barrel for the first time yesterday. Hurricane Humberto caused the shutdown of refineries in Port Arthur, Texas.

Hot Heads Win

A study in the Academy of Management Journal shows that adding emotions to the decision-making process can enhance creativity and that hot-headed stock investors make the best decisions, reports Reuters. Well, we know a lot of those types of investors, especially on days when the volatility pendulum swings into the negative zone. The study tracked 101 stock investors in simulated trading and was conducted by professors from the University of Maryland and Boston College. Their research found that the greater the average intensity of an individual's feelings, the greater their investment returns. Hmmm. Jim Cramer comes to mind.

We remember the day in July, not long after the Dow cracked 14,000, that an intense Cramer told investors to sell, sell, sell and not to buy. He also said the market was in for a period of volatility.

We've certainly never heard such heartfelt, emotional debates around monetary policy as we are hearing about the Fed's pending rate decision next week so if this study is right, clearly there's a lot of money to be made.

Friday Data Watch

Check out today's scheduled economic indicators, and market expectations at CNBC.com's economic calendar.

http://www.cnbc.com/id/15839153/site/14081545/

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