If you doubt the effect that stimulus has on stocks, look no farther than the headlines over this weekend.

The Shanghai market rallied more than two percent to its highest levels since 2009 after Premier Li Keqiang said China was prepared to take action to stimulate the economy and the government had a “host of policy instruments” it could use.

This is as close as you can get to Mario Draghi’s “whatever it takes” statement, and this is from the leader of China!

Read More Asia hinges on central bank actions this week

Europe is also rallying on the weakness in the euro (: EUR1M=) and the stimulus being provided by the European Central Bank. Germany’s DAX (XETRA: .GDAXI) is up 1.5 percent at another historic high, while France’s CAC (Euronext Paris: .FCHI) hit a seven-year high and Italian stocks touched a four-year high.

If you have any doubt this is stimulating interest in European equities, just take a look at the fund flows for far this year for Europe and the United States.

Q1 fund flows (source: EPFR/Financial Times):

  • European equity: $ 35.6 billion inflows
  • U.S. equity: $ 33.6 billion outflows

The inflows into Europe are mirroring the outflows from the United States. The previous record for European inflows was $ 32 billion in the first quarter of 2014.

You can’t blame investors-they are just following the money. The divergences are simply stunning this year.

Major markets in 2015:

  • Germany: up 23 percent
  • France: up 18 percent
  • Japan: up 10 percent
  • China: up 7 percent
  • S&P 500: down 0.3 percent

I noted last week it was another week of relative outperformance here in the United States for the small-cap Russell 2000 (Exchange: .RUT). This outperformance has also extended to the month, with the Russell flat, and the S&P 500 (CME:Index and Options Market: .INX) down 2.4 percent. The picture looks the same for the full year.

Read More The Fed could put the brakes on the dollar rally

Major indices this year:

  • Russell 2000: up 2.3 percent
  • S&P 500: down 0.3 percent

So it’s not so much “long Europe, short United States.” It’s “long small cap, short big caps.”

As for the Federal Reserve, the FOMC statement and the accompanying Yellen press conference will be the high point of the week. But for everyone expecting drama remember that Yellen has been theanti-drama queen, and she is likely to continue in that vein.

Yes, the FOMC will nod to the improving economy and the improving jobs market. Its members will almost certainly keep the statement that they will keep rates low “for some time.” My own feeling is the Fed will remove the “patient” phrase from its statement, but Yellen will emphasize that the omission does not imply the Fed will automatically be raising rates. Rather, a rate hike will remain “data dependent.”

Read More El-Erian: Expect new Fed ‘linguistic gymnastics’

As for her prior statements that the Fed might start hiking about two meetings after it changes the forward guidance, expect a lot of qualifiers that this is just the minimum amount of time. She will certainly note that while progress has been made toward its employment objective, there has been little progress toward the inflation goal.

Even this benign pitch is likely to cause some roiling in the markets, particularly in long bond yields, but it may be enough to at least moderate the dollar rally.

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