The US dollar appreciates, the Fed holds steady, and consumer spending drops
What could happen:
In Morgan Stanley's "risk scenario," the US dollar continues to appreciate at a pace, and despite inflation coming in below target the Fed does not ease monetary policy.
That creates volatility in risk assets like equities, and together with weaker growth that impacts consumer sentiment and spending.
Political uncertainty and a strong euro weighs on investment in Europe
What could happen:
Continued economic weakness could weigh on capital expenditure and productivity, according to Morgan Stanley.
No growth and a stronger euro could see the Euro Area shrink for a period of three or six months, leading the European Central Bank to extend quantitative easing into 2017.
Japan takes a hit from weaker global demand
What could happen:
A slow recovery in consumer spending could see the recovery in capital expenditure falter. Export demand falls and financial markets correct.
China's efforts to ease prove ineffective
What could happen:
Morgan Stanley's risk scenario includes an acceleration in capital outflows, forcing China's central bank to tighten monetary policy at a time when "underlying disinflationary pressures are persistent."
India stalls on critical reform efforts
What could happen:
Losses in local elections could force Indian prime minister Narendra Modi to abandon fiscal consolidation plans, and trigger increased spending.
That in turn could hit investor confidence in the country, leading to a slowdown in investment and a weakening of the currency.
Brazil returns to old policies
What could happen:
The government could cut taxes and rates in a bid to stimulate growth. That though could lead to rising bond yields, as investors doubt the country's ability to repay its debt load.
The currency could weaken further, causing inflation to spike.
A falling oil price and an international fallout hit Russia hard
What could happen:
The falling oil price could destabilise the currency, forcing central bank rate hikes and potentially capital controls.
That could combine with fresh sanctions, which would trigger capital outflows.
