TAIPEI: Trade next week in Taiwan's market may become volatile following a recent bull run, underpinned amid optimism over warming cross-Straits business ties, dealers said Friday.

The recent gains have significantly boosted market valuations, raising downside risks and making the bourse technically weaker, they said.

The financial sector may face further pressure after outperforming the broader market and leading gainers on hopes that Taiwan and the mainland will soon sign a memorandum of understanding on banking exchanges, they added.

However, ample liquidity due to continued inflows of foreign funds is likely to lend some support at around 6,200 points as the market faces profit-taking next week, dealers said.

Gains from any technical rebound during the trade may be capped at around 6,600 points next week, they said.

In the week to May 8, the weighted index rose 591.30 points, or 9.86 percent, to 6,583.87 after a 1.90 percent increase a week earlier.

Average daily turnover stood at NT$211.87 billion ($6.4 billion), compared with NT$128.28 billion a week ago.

"The market needs some time to consolidate before returning to its previous uptrend," Taiwan International Securities analyst Arch Shih said.

"It is not easy for the bourse to overcome the immediate technical barrier at around 6,600 points soon," Shih said.

Shih said volatility is expected to become obvious in the first half of next week to consume selling left from later this week.

Yuanta Securities Investment Consulting analyst Calvin Chen said he expects foreign institutional investors to continue building up their portfolios as they have lagged behind recent gains.

"Foreign money is expected to prevent the market from sharp falls, although the consolidation is inevitable," Chen said.

HSBC's economist Fred Neumann said the improving financial market sentiment shows that the economy in Taiwan is on its gradual path to recovery.

"Export in Taiwan has been improving, as the US economy starts to stabilize," Neumann said. "The Island's economy is better than its level a few months ago."

He added that the improvement in cross-Straits relations will also help improve Taiwan's economy over the next two to three years.

Agencies - China Daily

(HK Edition 05/09/2009 page5)