The clause lists the conditions under which Microsoft "will access, disclose and preserve personal data, including your content (such as the content of your emails, other private communications or files in private folders)..."
That narrow list of conditions includes legal demands, like search warrants and subpoenas and (presumably) National Security Letters, as well as actions necessary to "help prevent the loss of life or serious injury of anyone" or to stop attacks on Microsoft's services.
And those terms only apply to content stored online using Microsoft's services. Here's the earlier part of that agreement, the one that defines the content covered by that clause. This section of the agreement is apparently blocked by tinfoil and invisible to the Microsoft-is-spying brigade:
We collect content of your files and communications when necessary to provide you with the services you use. This includes: the content of your documents, photos, music or video you upload to a Microsoft service such as OneDrive. It also includes the content of your communications sent or received using Microsoft services...
So yes, if you send and receive email using Microsoft's consumer services or store files in OneDrive, there's a risk that a court could issue Microsoft a subpoena compelling them to hand over that information. (Pro tip: Microsoft offers Office 365 for Health, which provides cloud services and HIPAA compliance for medical professionals who care about that sort of thing.)
But there's no risk that Microsoft is gathering the contents of your local hard disk and sending it to anyone. Zero.
....
Any company that offers modern computing services has nearly identical language in its privacy agreement. Compare these snippets from the Google, Apple, and Microsoft privacy statements: