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Traders listening for signals from Bank of Japan

Wall Street NYSE
Michael Nagle | Bloomberg | Getty Images

Stocks will likely continue their drift higher Tuesday, while traders keep an eye on international headlines.

The only expected major news event is the Bank of Japan's monetary policy meeting, which is scheduled to conclude overnight Eastern Time, ahead of Tuesday's trading session.

"The market at this point is not expecting any change at all. It should be uneventful unless the Bank of Japan decides to do something," said Andres Jaime, global FX and rates strategist at Barclays.

"It's going to be more on what [BOJ Governor Haruhiko] Kuroda says and what kind of guidance or clues or how far they are from letting long term yields move higher," Jaime said.

In September, the Bank of Japan implemented "yield-curve control" — keeping its 10-year government bond yield at 0 percent in an effort to steepen the yield curve, or increase the difference with negative-yielding shorter-term bond yields. Such steepness theoretically increases profit margins for banks, and greater bank activity is generally better for economic growth.

"I think [Bank of Japan policymakers are] just going to be less stimulative in general. What's happened to them is they've gotten a free ride with dollar-yen and their economic data has been pretty good," said Ilya Feygin, managing director and senior strategist at WallachBeth Capital. "Right now they may pull back and do nothing."

Last Thursday the yen hit 118.66 against the dollar, its weakest since February. The yen strengthened slightly against the dollar Monday, briefly falling below 117.

The dollar index crept higher, above 103 again in late Monday trade, and the euro was near $1.040. The currency moves came after a truck plowed into a Christmas market in Berlin, Germany's capital, killing several and injuring many others. Police could not be certain the incident was an attack.

Earlier in the day, an off-duty police officer shot and killed the Russian ambassador to Turkey at an art gallery in the Turkish capital Ankara. Russian Foreign Ministry spokeswoman Maria Zakharova told reporters, "We regard this as a terrorist act."

"If you add it up, the dollar is the biggest culprit here," weighing on stocks, said Jeremy Klein, chief market strategist at FBN Securities. "These events, especially if they're in Europe, they're going to help the dollar versus the euro."

But as trading floors begin to quiet ahead of the Christmas and New Year's holidays, "I think [stocks will] probably drift a little higher still," he said.

U.S. stocks closed off session highs Monday but in positive territory, with the S&P 500 finishing up the day nearly 4.5 points higher at 2,262.53. Telecoms and technology were among the top gainers, while energy and health care lagged.

"Investors seem to be focusing on what's going on in the U.S. rather than what's going on internationally," said Dan Veru, chief investment officer at Palisade Capital Management. He's watching whether financials, the top performing sector since the election, can continue its recent rally.

No major U.S. economic reports are due for release Tuesday. FedEx and Nike are scheduled to post quarterly results after the close, while General Mills, BlackBerry, Darden Restaurants, CarMax, Carnival and Valspar are among those set to report ahead of the open.

The U.S. dollar index also found some support after Fed Chair Janet Yellen said the U.S. has the strongest jobs market in nearly a decade, and there are indications wage growth is picking up. Yellen was speaking at a University of Baltimore commencement ceremony.

"That basically says they've achieved their goal and they're no longer going to feel the need to be accommodative," said Bryce Doty, senior fixed income manager with Sit Investment Associates.

Treasury yields held slightly lower throughout Monday's session, and the two-year yield was last near 1.22 percent and the 10-year around 2.54 percent.

Lee Ferridge, head of macro strategy, North America, at State Street Global Markets, attributed some of Monday's decline in Treasury yields to "these China concerns." Yields move inversely to price.

China's government bond market has seen a sharp sell-off in the last several days as the U.S. dollar climbed on expectations of higher rates from the Federal Reserve. The drastic moves have forced Chinese authorities to intervene in the market. The concern is that if rates get too high, it could cause problems for China's growth, which is supported heavily by borrowing.

"People are starting to worry about it," Ferridge said. "Higher rates with that sort of debt overhang becomes a concern. ... The way we are now, we're almost priced for perfection and if anything goes wrong we could have a [negative] reaction, and China is one of the things that could cause a reaction like that."