Always good to know what’s connected to what at the moment. Helps you avoid jumping to conclusions as an investor.

After the July 29 market action around the world I’d say that when Chinese stocks fall–the Shanghai Composite was down 5% on the day, so do most other emerging stock markets (Brazil was down 2.3%, for example) and so do commodities such as oil. The U.S. dollar, on the other hand, goes up as traders seeks the safety of the world’s most liquid currency. That in turn sends oil and other commodities down some more.

Don’t let anyone tell you, however, that this was all because of worries about the U.S. economy. Traders and investors are no more worried about the U.S. economy than they were yesterday. (See my previous post for why Chinese stocks fell on July 29.)

Commodities fell across the board on the strength of the U.S. dollar and worries that China’s growth isn’t nearly as strong as it seems to be. The CRB Commodity Index fell 2.8% in the worst one-day drop in months. The price of crude was a big reason for the decline in the index. Oil dropped almost 6% to $63.55 a barrel. But gold also fell a little more than 1% and silver declined 3.5%.

See a theme here? The commodities that went down are precisely those that traders have used to bet against the U.S. dollar. Now I think they’ve got it right in the long term–given the size of various U.S. defitcits and debts, it’s hard to se the dollar being stronger than it is now in 10 years. But long-term trends aren’t smooth. They get interrupted by days days like July 29.

All it takes is a big dose of selling by domestic investors in China and the dominos start to fall around the world. I’d expect that we’ll see a few more days like this one in the next week or two until investors decide that the Beijing government isn’t about to kill off the economic growth it has wished for so hard.