I think it's more brinksmanship than a bluff. President has now put the credibility of the US on the line, and will have to invade if appropriate concession is not made (whether Bush should have done this in the first place is a whole other debate). But at this point, that's where we are.
But I do suspect that this may be brinksmanship, to force Iraq into appropriate inspections and disarmerment well beyond the games he was playing in 1998.
As far as how the market will react, I have no clue, no clue whatsover, other than it will do what it takes to fool the most people.