2008 has got off to a slow start, with fixed income in the toilet, M&A having stalled and, despite recent volatility, some equities units are also struggling. So far, although there's been pockets of jobs losses in London, there's been no major blood on the streets. The biggest culls in the City are thought to have taken place at Citi, Merrill Lynch and UBS, where redundancies are thought to have been in the low hundreds, rather than in the thousands.

Now The Financial Times reports that Duncan McKenzie, the director of economics at research group International Financial Services London, has said that City headcount is likely to be down some 10,000 this year (around 25% of the new jobs created in recent years), as firms adjust staffing levels to reflect the expected drop-off of revenues caused by the subprime lending and subsequent credit crisis.

The newspaper quotes one senior fixed income professional who says that 'morale is on the floor', and another London-based equities guy said that 'people are very concerned at the level of activity (so far this year). They are getting very nervous. Some areas are down 85%'. M&A bankers are also under pressure. Although 2007 was a record year, with investment banks bagging a staggering $42.4bn in fees from $4.05 trillion of announced deals, 64% of the deal action took place in the first half of the year. As Bloomberg points out, 'the overall 21% gain in the full year masked a 44% decline in the second half compared to the first half'. Since August, M&A has slumped, with most private equity firms pulling in their horns, and many CEOs uncertain about doing deals in the current climate.

Hedge funds, too, are struggling. Hedge fund losses in January are thought to have been the worst on record, with firms beginning to close their doors and lay off traders. And Financial News reports that credit traders are saying that they expect 'individual firms to continue announcing heavy losses for at least the next few months'. MarketWatch says that hedge funds that trade municipal bonds are especially vulnerable, with many having to sell assets to meet margin calls in the last few days. There are also growing fears that the liquidation of London-based Peleton's $2bn ABS Fund may just be the first of dozens of failures. In the US, the highly-regarded Focus Capital hedge fund is said to have started to unwind some of its biggest positions, and many are worried about what this bodes for the future.

Investment banks and other firms that operate in the financial markets have so far kept their nerve. Many feel that the current downturn, brought on by the subprime lending debacle, is a 12 month wonder and are reluctant to start massive headcount culls. They want to guard against laying off thousands now, only to have to hire many back again when things pick up. Unless market conditions improve some time soon, however, the job axe is likely to fall big time.

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