White House rejects Republican proposal to end debt ceiling stand off--I don't expect the market to give back ALL of today's rally

10/10/2013 7:20 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The New York Times and Reuters are reporting at 6 p.m. ET that President Barack Obama has rejected a proposal from Republican leaders of the House to raise the debt limit for six weeks in exchange for a promise that the two sides would sit down to work out a comprehensive budget deal.

The White House rejected the plan, the Times is reporting, because it would not end the shutdown of the Federal government.

The Republican leaders left a White House meeting with President Obama after about an hour and a half without speaking to reporters and returned to the Capitol to gather in House Speaker John Boehner’s office.

The one comment from Republicans that the Times is reporting is this quote from House Majority Leader Eric Cantor: “We had a very useful meeting, and we expect further conversations tonight.”

One reason for the rejection of the Republican proposal, the Times suggests, is doubts at the White House that Speaker Boehner could actually deliver the votes to pass his proposal. Conservative Republicans, who had pressed for the government shutdown and had refused to raise the debt ceiling, had said they would only go along with the Boehner proposal if the President agreed to negotiate a deal on the debt ceiling and on ending the government shutdown. “There won’t be a vote on a temporary extension of the debt limit unless the president agrees this afternoon to sit down and talk with us,” said Republican Representative John Fleming of Louisiana.

The White House has been adamant that it would not negotiate such a deal until Congress had passed both an increase in the debt ceiling and a continuing resolution that would reopen the government. Boehner’s proposal would have left the shutdown in place while Congress and the President negotiated.

How will markets react tomorrow to what is disappointing news after today’s rally on hope?

I’d expect selling—if for no other reason than profit taking on some of today’s gains.

But I can’t begin to predict how disappointed the market will be on this news. I thought markets were overly optimistic today on the Boehner proposal, considering all the obstacles it faced. If markets see the rejection of the deal by the White House as a trip back to zero, then I think we could unwind all of today’s gains.

But there is a good possibility that markets will see this Republican offer, even with the White House rejection, as a positive move since it does represent 1) the first actual proposal from the Republicans in the House and 2) a possible sign that Republicans are starting to look for a deal rather than simply pressing ahead toward default.

My best guess is that the markets won’t give back all of today’s rally (although somw selling will influenced by the approach of the weekend even though the equity markets are open on Monday.) And that at least some of today’s optimism will hold through Friday’s session.

But I would expect an uncomfortable degree of volatility in tomorrow’s session—especially considering how quickly the news is moving right now.

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