France’s parliamentary election has already caused investors concern as the country’s risk premium rises, but there are two potential scenarios that have not been priced in by markets and could affect stock markets in the wider region, says the Citi.

“Based on our model, the market is betting between a favorable outcome and a possible stalemate, with the valuation of a full stalemate just a few basis points away,” she told CNBC’s Squawk Box Europe. Beata Manthey, Citi’s Chief Investment Strategist.

“The market has not priced in a far-right or far-left majority” Manthey pointed out.

The tax plan and spending plan of both the far-right party Rassemblement National (RN) and the left-wing coalition Nouveau Front Populaire (NFP) are a major source of concern on the future volatility of French bonds. Economists have already warned of a debt crisis in the event that one of the two factions manages to gather a majority in the upcoming elections and is then able to pass, and quickly through its majority, its proposals.

Both parties are expected to do better in the first round of elections on Sunday than Emmanuel Macron’s centrist coalition. However, the path from here on out is characterized as highly uncertain.

A favorable outcome for markets it would either be for the centrist faction to find a way to win or a weak parliament will be elected in which neither faction will be able to advance their agenda.

Citi’s scripts

Citi adopted a series of scenarios for the outcome of the election, but also how they could affect the course of the French CAC 40, based on the possible movements of spreads between French and German bonds, which on Friday they hit 12-year highs and reached 85.2 basis points.

“The result is still quite uncertain, all we have at this stage are the polls for the first round of the election. We will know more on Sunday night.” Manthey said.

“Let’s frame what the early election announcement means for investors. Europe has been a very popular market, it has outperformed, international investors have shifted from the US market to the European market, with their positions being clearly long, particularly in the European banks.All this positive image has turned into ‘neutral’, but not negative” he added.

He also stated that “European stocks are trading at almost a 40% discount compared to the US, which is significantly higher than the historical average of 15-20%.”

“But valuations need an incentive. And heightened political risk is not it. That’s what worries me. Our model shows that right now the markets are fairly valued based on what analysts expect in terms of fundamentals.” Manthey added.

“Put another way, we have downgraded the European market and upgraded the US in the wake of heightened political risk. Among developed markets, the European tends to be the most vulnerable to such risks.

If the outcome of the French election is not friendly to the markets and CAC finds itself in a significant sell off, this will spill over into other markets.” Manthey concluded.