my bad tele. i haven't used direct monitoring in a while. it's done thru your sound card's mixer software. when you enable direct monitoring in cubase it just mutes the incoming signal. while direct monitoring, no input signals will be heard thru cubase but will be recorded. the track monitor button doesn't function when direct monitoring is enabled (imo, the track monitor button should become unavailable when direct monitoring is enabled).
my sound card has a monitor mixer. i have to choose between wave out and monitor mixer out to feed my sound card's outputs. for direct monitoring, monitor mixer must be chosen. there's a mixer to control each inputs monitoring volume and pan. your sound card should have something similar.