A Citigroup strategist predicts that France's election could have a significant impact on European stock markets.

• The bond market volatility is a major concern due to the tax and spend plans of both the Rassemblement National (RN) and Nouveau Front Populaire (NFP) parties.
• If either party gains a majority and rapidly implements their plans, it could lead to a debt crisis, according to some economists.

The two possible scenarios that could impact stocks in the wider European region have not been priced in by markets, despite the rise in France's risk premium due to its parliamentary election, according to Citi.

Beata Manthey, the bank's head of global equity strategy, stated on CNBC's "Squawk Box Europe" on Friday that our model predicts the market is pricing in a range between a positive outcome and a congestion, but not entirely, with only a few percentage points separating us from fully valuing the congestion.

Manthey stated that the market is not reflective of a far-right or far-left majority.

The bond market volatility is a major concern due to the tax and spend plans of both the Rassemblement National (RN) and Nouveau Front Populaire (NFP) parties. Some economists have warned that if either party forms a majority and pushes through their proposals quickly, it could lead to a debt crisis.

In Sunday's first round vote, both parties outperformed the centrist coalition led by President Emmanuel Macron's Renaissance party. Nevertheless, the future remains unclear.

A favorable market result could occur if centrist politicians discover a way to achieve success, or if a hung parliament prevents any party from advancing their agenda.

Citi analyzed various outcomes and their potential impact on Paris's stock market index, taking into account the recent increase in the spread between French and German bond yields.

We only have polling data for the first round of the election, so the outcome is still unclear. However, we'll have more information on Sunday evening, according to Manthey.

The election announcement should be viewed in relation to the investors' positioning in Europe. Europe has been a highly sought-after market, outperforming globally, and attracting international investors who have been shifting their investments from the U.S. to Europe. This has resulted in stretched or net long positions, particularly in European banks. However, this trend has now reversed, and the positioning has returned to neutral, although it is not negative.

The gap between European and U.S. stocks is currently around 40%, which is significantly higher than the historical average of 15-20%, according to her.

"Our model suggests that the increased political risks are not a trigger for valuations, which is what I worry about. However, our model suggests that the valuations are fairly priced for what the analysts expect on the fundamentals front," she continued.

"European equities are the most vulnerable to political risks within developed markets, while the U.S. has been upgraded."

If the French election outcome is market unfriendly, it can lead to a sell-off of the CAC, which can have spillover effects on other markets in Europe.