Talk last night centred on Merrill Lynch, which late on Wednesday shocked Wall Street with the admission that emerging market losses have all but wiped out profits since July.
Traders said that the statement from the company's chairman, David Komansky, accompanying a profits warning on Wednesday night that "selective cost reductions will have to be implemented" was a clear signal of cutbacks on the way. Sources said that the bonus pool had already been cut by 80 per cent.
Merrill has been among the most aggressive banks in building up its emerging market activities, much of which is now based in London.
Dealers say that they believe the City could see its biggest bout of bloodletting since 1994 when blue chip houses like Goldman Sachs were aggressively pruning back on headcount.
Since then banks have hired aggressively, especially in emerging markets. "This was an industry in growth phase. People are going to be stopping hiring short-term and cutting back, though not necessarily in the places you would expect."
Other banks which have suffered big emerging market hits recently, including Credit Suisse First Boston and Barclays Capital, have said that their operations are now under review.
City headhunters have been phoning staff in key positions in the hope of being able to exploit the widespread uncertainty.
"If you believe that we are not talking about a 20 per cent correction but a prolonged downturn, everyone will be having to make decisions," said one trader last night.
Merrill said last night: "We are constantly reviewing staffing levels in the light of market conditions."
Merrill said that it earned $102m so far this quarter, less than a fifth of what is made in the second quarter.