There's a reason the breakdown in budget talks happened after markets were closed -- it shows there is considerable fear about how markets might have reacted (though perhaps that's wishful thinking?). It also indicates that a "fear of what might happen" motivated agreement of some sort is still likely. (But what hold do financial markets have on the new Tea Party Republicans in the House? That's the wild card.)
Is it good news or bad news that fear might motivate an agreement?:
Shorter Obama Press Conference, by Michael Froomkin: I tried repeatedly to surrender to the House GOP, but they wouldn’t take even my most abject surrender. I have summoned them back to the White House tomorrow morning in another attempt to force them to accept it. If worst comes to worst, and they will not accept my surrender, I am prepared to accept theirs, but I really don’t like it, and will use the opportunity to campaign against Democratic values in the next election.
I'm hoping that they throw up their arms at some point, point fingers at each other as they lift the debt ceiling out of fear of what might happen if they don't, and take this fight up another day. That would at least give us a chance to try to bring some sense to Obama on entitlements and taxes, though it's looking more and more like that's a lost cause. He seems determined to show he's a Very Serious Person -- to show how tough he is -- by placing key Democratic programs on the sacrificial altar.
Update: I meant to add that the scenario may play out similarly to what happened with the financial market bailout. Congress will fail to do anything until markets actually react, and once they see what they have caused and the fear begins to mount, they will move very quickly to come to an agreement of some sort. The key will be to have something available as a back door when that happens (e.g. an improved McConnell plan).
How do you see this ending?