Yesterday morning at the opening of European bond markets – I must admit – I held my breath. Was this going to be another day of hammering Italian bonds – taking the yields to levels meaning that Italian borrowing cost for all the billions to be rolled over in the weeks to come would have left a new Italian government with no other option than to go to the bailout fund – as did Greece, Ireland and Portugal.

A bit nervous first minutes - and then a sigh of relief. The bonds were not sold off as the first moves and by the time we got to the result of the auction of 5 billion 12 month T-bills, the arrows actually pointed the other way. The auction result was seen as positive despite an interest rate above 6% and above the cost Greece paid for short=term money not that long time ago.

Italian bond yields improved throughout the day and the 10 year ended 0.50% below the high the day before.

Then rumours started circulating about an imminent announcement from one rating agency about France being put on a watch list – and possibly Austria as well. It felt like someone had gone heavily short – got it terribly wrong as Italy was not falling off the cliff – and then planted the rumours about France.

In the end it proved that the rumours about France was unfounded and the rating agency expected to put France on a watch list went public announcing they had no intention of doing so – now.

So – maybe the world is not falling apart – at least not this week. Maybe it is because we are all so nervous now that we go a bit blind and reacts a bit too much on any rumours circulating – without thinking about whether they make sense or not.

After all – there are some significant pieces now coming together.

1 - Greece has a new prime minister and soon a new government in place. The condition by Mr. Lucas Papademos to take the job was that all main parties should agree to the 27 October agreement – meaning that Greece will implement the conditions for this agreement – and cash to arrive in time.
If now euro-zone members can ratify this agreement without any problems – and Greece can live by the conditions put forward – then Greece should get out of the headline news for some time. Greece has a fair starting point. After all they got rid of 50% of their debt.

2 - Italy should have a new government in place shortly – as Wednesday should have given them a strong warning about what is at stake by not doing so. The Italian parliament should also take some steps they are not used to - and approve some of the structural reforms needed and general cuts to be made. If any of them had understood markets and seen what was at stake 2 days ago – they would get their act together – and quickly.

3 – France is not up for an immediate downgrading –which Sarkozy has out a lot of emphasis on avoiding. The austerity measures proposed earlier in the week are tough and it is also a tough small guy behind them. Many of the previous reforms this President has proposed over the last two years are now starting to work. France is in a better shape than two years ago – and France could emerge as a non-problem in the euro-zone quicker than the market thinks.

4 – With Super Mario at the helmet of ECB – calls for ECB to be more active in the second-hand market, raising or removing the limit they have for amounts to be purchased would maybe be a policy change he would favour. So might also be the more controversial proposal of printing Euros to support ECB’s market participation. It’s likely a tough nut for Germany to swallow – but up against more taxes for Germans to debt ridden euro-zone members – maybe the nut in fact is a camel they will swallow.

5 – Portugal – for which little attention has been seen in the markets of lately – emerges as one who more silently and more efficient has been able to implement the strong austerity measures needed – and where the first reports show that they are doing better than what sceptics would predict. Time looks to be what they need – and a market who leaves them in peace. The same I would say also goes for Spain – where some serious structural reforms now takes place for the purpose of coming to grip with the long-term future.

Approaching weekend – and seeing that some pieces have come together – and that others might follow soon – maybe the two days to come – without a market – should give us all the chance to reflect. Maybe we then will come to the conclusion that we are not all going nuts – but only take some roasting when uncertainty prevails.

Today we have a thin economic calendar and likely some thinner market conditions than for normal Fridays as it is a Veterans Day holiday. University of Michigan’s confidence report is due – and I like to pay notice to that one.

I wouldn'’t expect a lot to happen today – and as such – there might be some willingness to support the EURUSD to the upside – ahead of weekend.

Have a nice weekend.