First of all, let me just assure you that your edit was perfectly fine. It was a fault on the reviewer's side to reject such an edit. Please don't let this deter you from making useful edits.
Why could this have happened?
It is possible that the OP might have pressed the wrong button, however, this wasn't the first suggested edit that they reviewed, so it's highly unlikely that the rejection was just a mistake. It could also be that the OP might not like the idea of using in-site Markdown, and would rather choose using LaTeX (which is not at all recommended). But, as you say, the OP did edit it out themselves in the end. So, you see, we are not going to go anywhere speculating what might have triggered the rejection of your edit.
As of the rejection reason, I can't really think of any other rejection reason to use than this (assuming that your edit is supposed to be rejected, which is definitely the wrong move). That particular rejection reason can be used in cases where
the edit changes something which you'd not want it to change (the most probable case in this scenario)
the edit changes many things, totally changing the goal of the post (not applicable here)
So, in this light, it seems that the OP didn't really have any other options that to select this particular rejection reason (of course, you can write out any custom rejection reason if you want to, but the OP might be too lazy to do so).
You could also leave a comment explaining and requesting the OP to do a certain edit, if they've rejected your suggestion. This way, any user having edit privileges might come across your comment and edit the question right away.
Should the post owners be allowed to review suggested edits on their posts?
Yes. I believe that they should have the power to decide what they want on their post and what they don't. However, in most of the cases, when there are content disputes (misuse of edits, edit wars), you can always raise a custom moderator flag, asking the moderator to lock the post, thus preventing anyone from editing the posts. However, if you want this to change, this isn't the right place. The mother Meta is the right place to raise issues and request changes which affect the whole SE network.
It's the best to just ignore this edit rejection and move on. This edit rejection was the reviewer's mistake, not yours. As for your concern on recent rejected edits of yours, I encourage (and appreciate) you to go back to those and see why did they get rejected. Thus form a mental list of do's and don'ts when it comes to edits and use that criteria to suggest better edits. I can't wait to see you earn you editing privilege :-) You are halfway there! Good luck, and keep editing!