Summary:

3 Katyusha rockets land in Baghdad's Green Zone which houses government buildings, foreign missions and the US embassy.

The target was US embassy

Sirens go off at embassy

One rocket fell between embassy and a Govt building (Mayadeen)

It was supposed to be a day of de-escalation, so when Reuters, Sky News Arabia, Fox News and other sources reported that "several" Katuysha rockets were fired by the IRGC-backed Kataib Hezbollah and hit the Green Zone in Baghdad and explosions have been heard...

Loud explosions heard in Baghdad’s heavily fortified Green Zone which houses government buildings and foreign missions in Iraq, according to media reports.https://t.co/9tscFYNDrd pic.twitter.com/W81EGKTLsh — Al Arabiya English (@AlArabiya_Eng) January 8, 2020

Iraqi military confirms two rockets fell "inside" Baghdad's Green Zone. No casualties reported. https://t.co/Cb58f9qyGx https://t.co/q8l280wfdA — Louisa Loveluck (@leloveluck) January 8, 2020

... the headline-scanning algo reaction was swift.

Oil and gold jumped.

A clip posted by Fox News reporter Trey Yingst, presumably located near the embassy, confirms that sirens are blaring in Baghdad with the warning "incoming" heard in the background:

BREAKING: Rocket fire into Baghdad’s Green Zone pic.twitter.com/HaPcDaF22Z — Trey Yingst (@TreyYingst) January 8, 2020

Meanwhile, another clip suggests a fire has broken out in the Green Zone after the rocket attack:

VIDEO: Rockets land in the Baghdad Green Zone, fire has broken out pic.twitter.com/y49H2Mxbk7 — INTELWAVE (@inteldotwav) January 8, 2020

A Sky News correspondent said "there is no question that the rockets are from Iran":\

Two rockets have been fired into the Green Zone in Baghdad, Iraq causing sirens to go off at the US Embassy.



Our Middle East Correspondent @Stone_SkyNews says there is no suggestion that they are from Iran.



Read the latest here: https://t.co/KycdXHNE3l pic.twitter.com/PWAKa9tggP — Sky News (@SkyNews) January 8, 2020

The good news is that at least for now, no casualties have been reported:

According to an official #Iraq-I source two misilrs het the Green Zone, no causalities. https://t.co/Lp70Y1ypB0 — Feras Kilani فراس كيلاني (@FerasKilaniBBC) January 8, 2020



Why are markets sliding on the news? Because contrary to the carefully built narrative that the US and Iran have become nothing short of BBFs, the risk for re-escalation remains huge. As Stratfor noted this morning, Iraq, in particular, could present a theater for action, as Iranian-allied Iraqi militias have also been galvanized by the recent U.S. strikes and likely will be keen to seek retribution.

If an attack by those militias kills a U.S. soldier or contractor in Iraq or Syria, the risks of escalation to a direct military exchange between the United States and Iran would again climb. After all, the United States will hold Iran responsible for the actions of some of its allied militias, especially the mostly Shiite Popular Mobilization Forces in Iraq.

Then there are the old standby reasons: beyond strictly escalatory military exchanges, Iran's continued development of its nuclear program and its removal of limitations on enrichment and stockpiling significantly elevates the potential for longer-term military confrontation. And although Iran insists that the periodic acceleration it has undertaken with its nuclear program is reversible, the United States and Israel will be more likely to seriously consider military strikes against Iran's nuclear program to ensure Iran does not approach a nuclear weapons breakout stage too closely.

As such, contrary to the desires of bullish daytraders, the existence of these triggers for potential escalation and the atmosphere of tension that will linger between the two adversaries keeps the long-term risk of a military confrontation alive, even if their current face-off goes no further. It also explains why the market's selloff was so swift in the last minutes of trading.