The worldwide job cuts in investment banking announced by Merrill Lynch this week will not be the industry's last. Amid the market volatility, one thing is certain: Merrill Lynch's axing last week of 3,400 jobs, or 5 per cent of its worldwide workforce, will not be the last job losses on Wall Street and in other financial markets this year.

After several years of bull markets and aggressive global expansion, investment banks have suddenly been hit by a slide in revenues. It is unclear when their securities underwriting and takeover advisory businesses - highly profitable until recently - will recover.

In these "people" businesses, where the bulk of costs are compensation expenses, there is only one answer: job cuts. For those who keep their jobs, year-end bonuses are likely to be well below last year's, and disappointed bankers will find it much harder to change jobs in search of a better deal elsewhere.

"There are going to be job cuts all over the place," said one US headhunter. "Firms have over-expanded and overspent and many did it at the end of a bull market. They can't afford to pay these people."

But others in New York and London believe the concern may be overdone, seeing the shedding of excess staff as a natural part of such a cyclical business.

Some areas are worse hit than others. Most affected are emerging markets, especially Russia, and global fixed-income markets. The shrinking of emerging markets requires little explanation, but why has fixed income been hit so much harder than equities?

David Komansky, chairman and chief executive officer of Merrill Lynch, said: "The main issues we are dealing with as an industry are clearly fixed-income markets. It's trading more on fear than on reality."

Outside the US, the market for high-yield fixed income - paper issued by less creditworthy borrowers - is young and shallow. When yield differentials between these bonds and US treasuries widened dramatically, demand from issuers disappeared. Seeing no prospect of an early recovery, banks have cut their losses.

The fact that banks' primary equities departments, which advise companies on issuing shares, have not been reduced much yet reflects the different nature of the initial public offering market.

Flotations and privatisations, especially, are decided for strategic reasons, and are expected to proceed eventually, even if the launch has been delayed by market volatility. Having met their 1998 budgets already, some banks may even be grateful that revenues have been deferred into a new, probably leaner year.

Merrill, the world's leading bond underwriter, has been badly hit, but others face similar problems. Ironically, it is the biggest and most successful Wall Street firms, which have transformed themselves into global financial institutions in the last 10 years, which are the most vulnerable.

J.P. Morgan cut 5 per cent of its global workforce earlier this year and is expected to slash more jobs. Credit Suisse First Boston, among the worst hit by Russian market problems, is also expected to cut a sizeable percentage of its workforce, as is Salomon Smith Barney, which is also coping with a merger with Citicorp.

But firms such as Paine Webber, which had been criticised for failing to expand overseas, now enjoy relatively stable earnings from US retail brokerage. Paine Webber is planning to hire staff. "Our strategy is the right strategy and the current market environment reinforces that," said Donald Marron, chairman and chief executive officer.

Like the market turmoil which is causing it, the wave of job cuts started in Asia last year, where it was dismissed as a local problem, even when Hong Kong-based Peregrine collapsed and Caspian Securities, an emerging markets specialist, folded. It was still ignored by many when second-tier banks like Flemings of Britain, Spain's Santander Investment and Germany's Westdeutsche Landesbank cut jobs.

Dutch-owned ING Barings, which is losing 1,200 of its 10,000 worldwide staff, and Merrill have brought the issue to the forefront. But while they made sweeping cuts, others slice here and there with less fanfare. Warburg Dillon Read, UBS's investment bank, does not plan across-the-board cuts, but will trim piecemeal, based on client demand. For example, if business relating to Indonesia dried up, WDR would reduce the resources devoted to it.

Mitigation is high on the agenda of executives everywhere. Controlling compensation is one of the highest priorities.

"They are eating up their profits in bonus pools," said Laura Lofaro, president of Sterling Resources International, a US recruitment consultancy. But cutting bonuses may not be enough, and more jobs will have to go.

Although bonuses are likely to be substantially lower than last year, revenues in the first half of the year, when the markets were extremely strong, are computed into bonus numbers. Furthermore, many firms lured highfliers with the promise of guaranteed bonuses for at least the first year, and some of these are still running, according to some recruitment specialists.

Investment banks have also tried to offset the volatility of the securities business by finding more stable sources of revenue. Merrill Lynch, for example, last year bought Britain's largest fund manager, Mercury Asset Management, and is rapidly expanding its private banking network in Britain. Both activities escaped unscathed from this week's job cuts.

Investment banking is causing tension for similar reasons within UBS, Europe's largest bank. Union Bank of Switzerland was decidedly accident-prone before the merger that created UBS, losing 625 million Swiss francs (£309 million) on equity derivatives and another 950 million Swiss francs on its exposure to Long Term Capital Management.

Many banks may find it harder to cut jobs this time because they are not as overstaffed as in previous downturns. "Merrill and a number of others didn't bloat up the way they normally did in expansions," said Michael Lipper of Lipper Analytical. In the past, it had been easier to cut jobs in the back office, where trades were settled. This is now more difficult as a result of automation.

For the big investment banks, it is unlikely things will improve much until "some stability in financial markets helps us in restarting our underwriting business", admitted Joe Roby, president and chief executive officer of Donaldson, Lufkin & Jenrette, which reported a sharp fall in third-quarter earnings last week. For the moment, activity is frozen in uncertainty because of market volatility. "If I had to say whether investment banking revenues would be up, down or flat next year, my guess is they'll be down," one banker said.

If markets fail to improve in the fourth quarter, there could be a second round of job cuts early next year. But Michael Marks, Merrill's executive chairman for Europe, the Middle East and Africa, said: "We think this is it."

Those who do lose their jobs are likely to find it hard to get new ones on Wall Street.

"For anyone who is in mid-career, the chances are high" that they will never get another job in the industry, said one Wall Street headhunter.

But the flight to quality applies just as much to jobs as to investments. One banker said: "The best people will continue to command very high salaries because they have a very high value." But for many, it is time for high anxiety.