It was a true sucker’s rally earlier this week: investors around the world piled into shares on Tuesday before having second thoughts in Europe and then America overnight. And local investors got sucked in and then spat out today with the market off 122 points, or around 2.4%, in the first half hour.

Predictions that the worst could be over following Tuesday’s rally proved premature as the commodities bubble headed south. Gold, oil, copper, wheat, corn, sugar and a host of other commodities all slumped sharply in value. Gold shed $US59 an ounce, its biggest ever single one day fall as financial investors and other players took profits and ran.

But they obviously didn’t head for the stockmarket because the Dow, S&P 500 and Nasdaq all had heavy losses: the Dow shed 293. The popping of the commodity bubble was heard on Monday but ignored in Tuesday’s euphoria. Yesterday investors got the message and they headed for the safety of the bond market or cash.

Helping investors make up their minds was a slight upturn in the value of the US dollar yesterday. Not much, but enough to give credence to claims the Fed was not going to continue cutting rates as quickly as it has been.

As a result, speculators who had shorted the yen or euro to buy commodities had to close out contracts: they got nervous and decided cash was best.

The yield on the three month US treasury note fell to the lowest level since 1958, just 0.56%. That’s less than the 0.75% cut in the Federal Funds Rate on Tuesday. The yield on 10 year US treasury bonds dropped to 3.34%, reversing the biggest rise in four years on Tuesday after the Fed cut rates; the yield on the two year bond tumbled to 1.47%.

That’s a sign of very worried investors: people who are prepared to take half a per cent for three months are terrified of losing their money. One broker says its all about “capital preservation” not profits. So when you read about analyst upgrades for Macquarie Group and National Australia Bank, remember what the hard heads in the US are doing.

Meanwhile, London markets fell by around 60 points after rumours emerged of a bank having liquidity problems. The stories are being investigated by regulators who fear that it could be the work of groups shorting bank shares. HBOS, Britain’s biggest mortgage bank and owner of Bankwest, was the one most rumoured and its shares plunged 17% (after a big fall on Monday as well). The London Telegraph reported:

An email circulated in the City by an anonymous banker, seen by The Daily Telegraph, falsely alleged that a newspaper was to run an article today on problems at HBOS which “will raise the spectre of a run on the bank”.

It was also falsely alleged that HBOS, Britain’s biggest mortgage lender, had sought emergency talks with the Bank of England over the Easter weekend.

Those claims are being investigated by the FSA, but the fact they were believed by so many investors shows just how delicate sentiment is at the moment.